OPTIONS. MARKETS. John C. Hull. Maple Financial Group Professor of
Derivatives and Risk Management. Joseph L. Rotman School of Management.
EIGHTH
EDITION
FUNDAMENTALS FUTURES
AND
OF
OPTIONS
MARKETS
John C. Hull Maple Financial Group Professor of Derivatives and Risk Management Joseph L. Rotman School of Management University of Toronto
PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Introduction Futures Contracts History of Futures Markets The Over-the-Counter Market Forward Contracts Options History of Options Markets Types of Trader Hedgers Speculators Arbitrageurs Dangers Summary Further Reading Quiz Practice Questions Further Questions
Mechanics of Futures Markets Opening and Closing Futures Positions Specification of a Futures Contract Convergence of Futures Price to Spot Price The Operation of Margin Accounts OTC Markets Market Quotes Delivery Types of Trader and Types of Order Regulation Accounting and Tax Forward vs. Futures Contracts Summary Further Reading Quiz Practice Questions Further Questions
Hedging Strategies Using Futures Basic Principles Arguments lor and Against Hedging Basis Risk Cross Hedging Stock Index Futures Stack and Roll Summary Further Reading Quiz Practice Questions Further Questions Appendix: Review of Key Concepts in Statistics and the CAPM
^9 ^ 5_ ^ ^ ^ (,t)
70 71 72 73 74 76
Chapter 4: 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8
Interest Rates Types of Rates Measuring Interest Rates Zero Rates Bond Pricing Determining Treasury Zero Rates Forward Rates Forward Rate Agreements Theories of the Term Structure of Interest Rates Summary Further Reading Quiz Practice Questions Further Questions Appendix: Exponential and Logarithmic Functions
Determination of Forward and Futures Prices Investment Assets vs. Consumption Assets Short Selling Assumptions and Notation Forward Price for an Investment Asset Known Income Known Yield Valuing Forward Contracts Are Forward Prices and Futures Prices Equal'.' Futures Prices of Stock Indices Forward and Futures Contracts on Currencies Futures on Commodities The Cost of Carry Delivery Options Futures Prices and the Expected Spot Prices Summary Further Reading Quiz
104 104 105 10(, 107 110 1 |] 1| ] 1 is I Is I |7 12i 124 124 12.S py I -O 129
vii Practice Questions Further Questions
.129 .131
Interest Rate Futures Day Count and Quotation Conventions Treasury Bond Futures Eurodollar Futures Duration Duration-Based Hedging Strategies Using Futures Summary Further Reading Quiz Practice Questions Further Questions Swaps Mechanics of Interest Rate Swaps Day Count Issues Confirmations The Comparative-Advantage Argument The Nature of Swap Rates Overnight Indexed Swaps Valuation of Interest Rate Swaps Estimating the Zero Curve for Discounting Forward Rates Valuation in Terms of Bonds Term Structure Effects Fixed-for-Fixed Currency Swaps Valuation of Fixed-for-Fixed Currency Swaps Other Currency Swaps Credit Risk Other Types of Swap Summary Further Reading Quiz Practice Questions Further Questions
Securitization and the Credit Crisis of 2007 Securitization The U.S. Housing Market What Went Wrong? The Aftermath Summary Further Reading Quiz Practice Questions Further Questions
Option Positions Underlying Assets Specification of Stock Options Trading Commissions Margin Requirements The Options Clearing Corporation Regulation Taxation Warrants, Employee Stock Options, and Convertibles Over-the-Counter Options Markets Summary Further Reading Quiz Practice Questions Further Questions
13 " 1
-—4 — ^'S 226 —7 —
Chapter 10: 10.1 10.2 10.3 10.4 10.5 10.6 10.7
Properties of Stock Options Factors Affecting Option Prices Assumptions and Notation Upper and Lower Bounds for Option Prices Put-Call Parity Calls on a Non-Dividend-Paying Stock Puts on a Non-Dividend-Paying Stock Effect of Dividends Summary Further Reading Quiz Practice Questions Further Questions
232
Chapter 11: 11.1 1.2 1.3 1.4 11.5
Trading Strategies Involving Options Principal-Protected Notes Strategies Involving a Single Option and a Stock Spreads Combinations Other Payoffs Summary Further Reading Quiz Practice Questions Further Questions
254 254 256 258 266 269 269 270 270 271 271
Chapter 12: 12.1 12.2 12.3 12.4 12.5 12.6
Introduction to Binomial Trees A One-Step Binomial Model and a No-Arbitrage Argument Risk-Neutral Valuation Two-Step Binomial Trees A Put Example American Options Delta
273 273 277 279
236 236 240 244 24."^ 248 249 250 2.M) 251 252
2S"(
Contents
ix
12.7 Determining it and d 12.8 Increasing the Number of Time Steps 12.9 Using DerivaGem 12.10 Options on Other Assets Summary Further Reading Quiz Practice Questions Further Questions Appendix: Derivation of the Black-Scholes-Merton Option Pricing Formula from Binomial Tree Chapter 13: 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 13.10
285 286 287 287 292 292 292 293 294 296
Valuing Stock Options: The Black-Scholes-Merton Model Assumptions about How Stock Prices Evolve Expected Return Volatility Estimating Volatility from Historical Data Assumptions Underlying Black-Scholes-Merton The Key No-Arbitrage Argument The Black-Scholes-Merton Pricing Formulas Risk-Neutral Valuation Implied Volatilities Dividends Summary Further Reading Quiz Practice Questions Further Questions Appendix: The Early Exercise of American Call Options on Dividend-Paying Stocks
Employee Stock Options Contractual Arrangements Do Options Align the Interests of Shareholders and Managers? Accounting Issues Valuation Backdating Scandals Summary Further Reading Quiz Practice Questions Further Questions
323 323 325 326 328 329 331 331 332 332 333
Chapter 15: 15.1 15.2 15.3 15.4 15.5 15.6
Options on Stock Indices and Currencies Options on Stock Indices Currency Options Options on Stocks Paying Known Dividend Yields Valuation of European Stock Index Options Valuation of European Currency Options American Options
334 334 337 339 341 344 345
X Summary Further Reading Practice Questions Further Questions Chapter 16: 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 16.10 16.11
Futures Options Nature of Futures Options Reasons for the Popularity of Futures Options European Spot and Futures Options Put-Call Parity Bounds for Futures Options Valuation of Futures Options Using Binomial Trees A Futures Price as an Asset Providing a Yield Black's Model for Valuing Futures Options Using Black's Model Instead of Black-Scholes -Merlon American Futures Options vs. American Spot Options Futures-Style Options Summary Further Reading Quiz Practice Questions Further Questions
The Greek Letters Illustration Naked and Covered Positions A Stop-Loss Strategy Delta Hedging Theta Gamma Relationship Between Delta, Theta, and Gamma Vega Rho The Realities of Hedging Scenario Analysis Extension of Formulas Creating Options Synthetically for Portfolio Insurance Stock Market Volatility Summary Further Reading Quiz Practice Questions Further Questions
Chapter 18: Binomial Trees in Practice 18.1 The Binomial Model for a Non-Dividend-Paying Stock 18.2 Using the Binomial Tree for Options on Indices^ Currencies, and Futures Contracts 18.3 The Binomial Model for a Dividend-Paying Stock
18.4 Extensions of the Basic Tree Approach 18.5 Alternative Procedure for Constructing Trees 18.6 Monte Carlo Simulation Summary Further Reading Quiz Practice Questions Further Questions Chapter 19: 19.1 19.2 19.3 19.4
410 412 412 414 415 415 416 417
Volatility Smiles Foreign Currency Options Equity Options The Volatility Term Structure and Volatility Surfaces When a Single Large Jump Is Anticipated Summary Further Reading Quiz Practice Questions Further Questions Appendix: Why the Put Volatility Smile is the Same as the Call Volatility Smile
Value at Risk The VaR Measure Historical Simulation Model-Building Approach Generalization of Linear Model Quadratic Model Estimating Volatilities and Correlations Comparison of Approaches Stress Testing and Back Testing Summary Further Reading Quiz Practice Questions Further Questions
Interest Rate Options Exchange-Traded Interest Rate Options Embedded Bond Options Black's Model European Bond Options Interest Rate Caps European Swap Options Term Structure Models Summary Further Reading Quiz Practice Questions Further Questions
Exotic Options and Other Nonstandard Produe: Exotic Options Agency Mortgage-Backed Securities Nonstandard Swaps Summary Further Reading Quiz Practice Questions Further Questions Chapter 23: Credit Derivatives 23.1 Credit Default Swaps 23.2 Valuation of Credit Default Swaps 23.3 Total Return Swaps 23.4 CDS Forwards and Options 23.5 Credit Indices 23.6 The Use of Fixed Coupons 23.7 Collateralized Debt Obligations Summary Further Reading Quiz Practice Questions Further Questions Chapter 24: Weather, Energy, and Insurance Derivatives 24.1 Weather Derivatives 24.2 Energy Derivatives 24.3 Insurance Derivatives Summary Further Reading Quiz Practice Questions Further Question Chapter 25: Derivatives Mishaps and What We Can Learn From Them 25.1 Lessons for All Users of Derivatives 25.2 Lessons for Financial Institutions 25.3 Lessons for Nonfinancial Corporations Summary Further Reading Answers to Quiz Questions Glossary of Terms DerivaGem Software Major Exchanges Trading Futures and Options Table for N(x) When x ^ 0 Table for N(x) When x > 0 Index
