NINTH EDITION FUNDAMENTALS OF FUTURES AND OPTIONS MARKETS .
John C. HüllMaple Financial Group Professor of Derivatives and Risk ManagementJoseph L. Rotman School of ManagementUniversity of TorontoPEARSONBoston Columbus Indianapolis New York San FranciscoAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City Säo Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
ContentsPrefacexvChapter utures ContractsHistory of Futures MarketsThe Over-the-Counter MarketForward ContractsOptionsHistory of Options MarketsTypes of Further ReadingQuizPractice QuestionsFurther Questions1124671011111417181820202022Chapter 2:2.12.22.32.42.52.62.72.82.92.102.11Futures Markets and Central CounterpartiesOpening and Closing Futures PositionsSpecification of a Futures ContractConvergence of Futures Price to Spot PriceThe Operation of Margin AccountsOTC MarketsMarket QuotesDeliveryTypes of Trader and Types of OrderRegulationAccounting and TaxForward vs. Futures ContractsSummaryFurther ReadingQuizPractice QuestionsFurther Questions2424252829323537383940424445454647vii
ContentsChapter 3:3.13.23.33.43.53.6Hedging Strategie* Using FuturesBasic PrinciplesArguments for and Against HedgingBasis RiskGross HedgingStock Index FuturesStack and RollSummaryFurther ReadingQuizPractice QuestionsFurther QuestionsAppendix: Review of Key Concepts in Statistics and the CAPM49495255596369707272737476Chapter 4:4.14.24.34.44.54.64.74.84.94.10Interest RatesTypes of RatesSwap RatesThe Risk-Free RateMeasuring Interest RatesZero RatesBond PricingDetermining Zero RatesForward RatesForward Rate AgreementsTheories of the Term Structure of Interest RatesSummaryFurther ReadingQuizPractice QuestionsFurther QuestionsAppendix: Exponential and Logarithmic hapter etermination of Forward and Futures PricesInvestment Assets vs. Consumption AssetsShort SellingAssumptions and NotationForward Price for an Investment AssetKnown IncomeKnown YieldValuing Forward ContractsAre Forward Prices and Futures Prices Equal?Futures Prices of Stock IndicesForward and Futures Contracts on CurrenciesFutures on CommoditiesThe Cost of CarryDelivery OptionsFutures Prices and Expected Spot PricesSummaryFurther 28130131
ixQuizPractice QuestionsFurther Questions.132.132.134Interest Rate FuturesDay Count and Quotation ConventionsTreasury Bond FuturesEurodollar FuturesDurationDuration-Based Hedging Strategies Using FuturesSummaryFurther ReadingQuizPractice QuestionsFurther 159SwapsMechanics of Interest Rate SwapsDay Count IssuesConfirmationsThe Comparative-Advantage ArgumentValuation of Interest Rate SwapsHow the Value Changes through TimeFixed-for-Fixed Currency SwapsValuation of Fixed-for-Fixed Currency SwapsOther Currency SwapsCredit RiskCredit Default SwapsOther Types of SwapsSummaryFurther ReadingQuizPractice QuestionsFurther 182.183184.185185186.188Securitization and the Credit Crisis of 2007SecuritizationThe U.S. Housing MarketWhat Went Wrong?The AftermathSummaryFurther ReadingQuizPractice QuestionsFurther Questions,190190194198200202.202203203204Mechanics of Options MarketsTypes of OptionOption PositionsUnderlying AssetsSpecification of Stock Options,205205208210211
ionsMargin RequirementsThe Options Clearing CorporationRegulationTaxationWarrants, Employee Stock Options, and ConvertiblesOver-the-Counter Options MarketsSummaryFurther ReadingQuizPractice QuestionsFurther apter 10:10.110.210.310.410.510.610.7Properties of Stock OptionsFactors Affecting Option PricesAssumptions and NotationUpper and Lower Bounds for Option PricesPut-Call ParityCalls on a Non-Dividend-Paying StockPuts on a Non-Dividend-Paying StockEffect of DividendsSummaryFurther ReadingQuizPractice QuestionsFurther apter 11:11.111.211.311.411.5Trading Strategies Involving OptionsPrincipal-Protected NotesStrategies Involving a Single Option and a StockSpreadsCombinationsOther PayoffsSummaryFurther ReadingQuizPractice QuestionsFurther Questions249249251253261264264265265266266Chapter n to Binomial TreesA One-Step Binomial Model and a No-Arbitrage ArgumentRisk-Neutral ValuationTwo-Step Binomial TreesA Put ExampleAmerican OptionsDeltaDetermining u and dIncreasing the Number of Time StepsUsing DerivaGem268268272274277278279280281282
xiOptions on Other AssetsSummaryFurther ReadingQuizPractice QuestionsFurther QuestionsAppendix: Derivation of the Black Scholes- -Merton Option PricingFormula from Binomial Tree.282.287.287.287.288.289Valuing Stock Options: The Black-Scholes-Merton ModelAssumptions about How Stock Prices EvolveExpected ReturnVolatilityEstimating Volatility from Historical DataAssumptions Underlying Black-Scholes-MertonThe Key No-Arbitrage ArgumentThe Black-Scholes-Merton Pricing FormulasRisk-Neutral ValuationImplied VolatilitiesDividendsSummaryFurther ReadingQuizPractice QuestionsFurther QuestionsAppendix: The Early Exercise of American Call Options onDividend-Paying 311.312.313.313.315Employee Stock OptionsContractual ArrangementsDo Options Align the Interests of Shareholders and Managers?Accounting IssuesValuationBackdating ScandalsSummaryFurther ReadingQuizPractice QuestionsFurther 327Options on Stock Indices and CurrenciesOptions on Stock IndicesCurrency OptionsOptions on Stocks Paying Known Dividend YieldsValuation of European Stock Index OptionsValuation of European Currency OptionsAmerican OptionsSummaryFurther 6
xjjContentsPractice QuestionsFurther Questions341343Chapter utures Options and Black s ModelNature of Futures OptionsReasons for the Popularity of Futures OptionsEuropean Spot and Futures OptionsPut-Call ParityBounds for Futures OptionsA Futures Price as an Asset Providing a YieldBlack's Model for Valuing Futures OptionsUsing Black's Model Instead of Black-Scholes-MertonValuation of Futures Options Using Binomial TreesAmerican Futures Options vs. American Spot OptionsFutures-Style OptionsSummaryFurther ReadingQuizPractice QuestionsFurther 6356356357Chapter 7.1217.1317.14The Greek LettersIllustrationNaked and Covered PositionsGreek Letter CalculationDeltaThetaGammaRelationship Between Delta, Theta, and GammaVegaRhoThe Realities of HedgingScenario AnalysisExtension of FormulasCreating Options Synthetically for Portfolio InsuranceStock Market VolatilitySummaryFurther ReadingQuizPractice QuestionsFurther 2385385387387388389Chapter 18: Binomial Trees in Practice18.1 The Binomial Model for a Non-Dividend-Paying Stock18.2 Using the Binomial Tree for Options on Indices, Currencies, and FuturesContracts18.3 The Binomial Model for a Dividend-Paying Stock18.4 Extensions of the Basic Tree Approach18.5 Alternative Procedure for Constructing Trees18.6 Monte Carlo Simulation391391398401405407407
ContentsxiiiSummaryFurther ReadingQuizPractice QuestionsFurther Questions409410410411412Volatility SmilesForeign Currency OptionsEquity OptionsThe Volatility Term Structure and Volatility SurfacesWhen a Single Large Jump Is AnticipatedSummaryFurther ReadingQuizPractice QuestionsFurther QuestionsAppendix: Why the Put Volatility Smile is the Same as the CallVolatility Smile413413416418420421422423423424426Chapter 20:20.120.220.320.420.520.620.720.8Value at Risk and Expected ShortfallThe VaR and ES MeasuresHistorical SimulationModel-Building ApproachGeneralization of Linear ModelQuadratic ModelEstimating Volatilities and CorrelationsComparison of ApproachesBack TestingSummaryFurther ReadingQuizPractice QuestionsFurther 5Chapter 21:21.121.221.321.421.521.621.7Interest Rate OptionsExchange-Traded Interest Rate OptionsEmbedded Bond OptionsBlack's ModelEuropean Bond OptionsInterest Rate CapsEuropean Swap OptionsTerm Structure ModelsSummaryFurther ReadingQuizPractice QuestionsFurther apter 19:19.119.219.319.4Chapter 22: Exotic Options and Other Nonstandard Products22.1 Exotic Options22.2 Agency Mortgage-Backed Securities477477484
xjvContents22.3 Nonstandard SwapsSummaryFurther ReadingQuizPractice QuestionsFurther QuestionsChapter 23:23.123.223.323.423.523.623.7Credit DerivativesCredit Default SwapsValuation of Credit Default SwapsTotal Return SwapsCDS Forwards and OptionsCredit IndicesThe Use of Fixed CouponsCollateralized Debt ObligationsSummaryFurther ReadingQuizPractice QuestionsFurther 9511512512513513Chapter 24:24.124.224.3Weather, Energy, and Insurance DerivativesWeather DerivativesEnergy DerivativesInsurance DerivativesSummaryFurther ReadingQuizPractice QuestionsFurther QuestionChapter 25: Derivatives Mishaps and What We Can Learn From Them25.1 Lessons for All Users of Derivatives25.2 Lessons for Financial Institutions25.3 Lessons for Nonfinancial CorporationsSummaryFurther ReadingAnswers to Quiz QuestionsGlossary of TermsDerivaGem 534535559577Major Exchanges Trading Futures and OptionsTable for N(x) When x 0581582Table for N(x) When x 0583Index585
1.8 Hedgers 11 1.9 Speculators 14 1.10 Arbitrageurs 17 1.11 Dangers 18 Summary 18 Further Reading 20 Quiz 20 Practice Questions 20 Further Questions 22 Chapter 2: Futures Markets and Central Counterparties 24 2.1 Opening and Closing Futures Positions 24 2.2 Specification of a Futures Contract 25
Financial Futures 1. The mechanics of investing in futures 2. Leverage 3. Hedging 4. The selection of commodity futures contracts 5. The pricing of futures 6. Non-commodity futures -Financial futures and currency futures 7. Swaps 2 3 Difference Between Futures and Opti
Options, Futures, and Other Derivatives By John Hull Prentice Hall 6th Edition ISBN: 0131499084 Table of Contents Preface. 1. Introduction. 2. Mechanics of Futures Markets. 3. Hedging Strategies Using Futures. 4. Interest Rates. 5. Determination of Forward and Futures Prices. 6. Interest Rate Futures. 7. Sw
Currency Futures Options Are an option on a currency futures contract. Exercise of a currency futures option results in a long futures position for the holder of a call or the writer of a put. Exercise of a currency futures option results in a short futures position for the seller of a call or the buyer of a put.
The standardization of futures contracts affords tremendous flexibility. Because futures contracts are standardized, sellers and buyers can exchange one contract for another and "offset" their obligation to take delivery on a commodity or instrument underlying the futures contract. Offset in the futures market means taking another futures .
the Futures Industry Association's statistics on single stock futures traded at five exchanges show volume in 2000 increased to 2.6 million from 1.4 in 1999. In January 2001, the London International Financial Futures Exchange (LIFFE) introduced single stock futures on 30 stocks, seven of which are for U.S. based firms. Within the first
3 and 10 Year Treasury Bond Futures Features The 3 and 10 Year Treasury Bond Futures contracts are ranked amongst the 152 most traded long term interest rate futures contracts in the world today. Average daily turnover in 2016 was 202,000 and 156,000 contracts for the 3 and 10 Year Treasury Bond Futures, respectively.
Binomial Model for Forward and Futures Options Futures price behaves like a stock paying a continuous dividend yield of r. – The futures price at time 0 is (p. 437) F SerT. – From Lemma 10 (p. 275), the expected value of S at time t in a risk-neutral economy is Ser t. – So the expected futures price at time t is S
Key words: Organization, Classical theory, Taylor, Fayol and Weber. Introduction The society we belong is an organizational society. Modern society has retained high morale value of rationality, efficiency and effectiveness in contrast to previous society (Etzioni, 1964). There are relationships between individuals and organizations. It is
