SEVENTH EDITION. FUNDAMENTALS OF. FUTURES AND OPTIONS.
MARKETS. GLOBAL EDITION. John C. Hull /. Maple Financial Group Professor of
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SEVENTH
EDITION
FUNDAMENTALS OF FUTURES AND OPTIONS MARKETS GLOBAL EDITION John C. Hull
/
Maple Financial Group Professor of Derivatives and Risk Management Joseph L. Rotman School of Management University of Toronto
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
Business snapshots Preface Introduction Mechanics of futures markets Hedging strategies using futures Interest rates Determination of forward and futures prices Interest rate futures Swaps Securitization and the credit crisis of 2007 Mechanics of options markets Properties of stock options ." Trading strategies involving options Introduction to binomial trees Valuing stock options: The Black-Scholes-Merton model Derivatives markets in developing countries Options on stock indices and currencies Futures options The Greek letters Binomial trees in practice Volatility smiles ( Value at risk Interest rate options Exotic options and other nonstandard products Credit derivatives Weather, energy, and insurance derivatives Derivatives mishaps and what we can learn from them Answers to quiz questions Glossary of terms DerivaGem software Major exchanges trading futures and options Tables for N(x) Index
Introduction Futures Contracts History of Futures Markets The Over-the-Counter Market Forward Contracts Options History of Options Markets Types of Traders 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 Margins OTC Markets Newspaper 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 for and against Hedging Basis Risk Cross Hedging Stock Index Futures Rolling the Hedge Forward Summary Further Reading .^ Quiz ".'....:.'.: Practice Questions Further Questions Appendix: Review of Key Concepts in Statistics and the CAPM
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
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 Determining LIBOR/Swap Zero Rates Valuation of Interest Rate Swaps Currency Swaps Valuation of Currency Swaps Credit Risk Other Types of Swap Summary Further Reading Quiz Practice Questions Further Questions
Chapter 8: 8.1 8.2 8.3 8.4
Securitization and the Credit Crisis of 2007 Securitization The U.S. Housing Market What Went Wrong? Avoiding Future Crises Summary Further Reading Quiz Practice Questions Further Questions
189 189 193 197 198 201 202 202 203 _ 203
Chapter 9: 9.1 9.2 9.3 9.4 9.5 9.6
Mechanics of Options Markets Types of Option Option Positions Underlying Assets Specification of Stock Options Trading Commissions
Margins The Options Clearing Corporation Regulation Taxation Warrants, Employee Stock Options, and Convertibles Over-the-Counter Markets Summary Further Reading Quiz ; Practice Questions "!...:.r..~. Further Questions
217 218 219 219 221 222 222 223 223 224 225
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
Chapter 11: 11.1 11.2 11.3 11.4
Trading Strategies Involving Options Strategies Involving a Single Option and a Stock Spreads Combinations Other Payoffs Summary Further Reading Quiz Practice Questions Further Questions
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 Determining u and d Increasing the Number of Time Steps Options on Other Assets Summary Further Reading Quiz
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 7 Dividends Valuing Employee Stock Options Summary Further Reading Quiz Practice Questions Further Questions .' Appendix: The Early Exercise of American Call Options on Dividend-Paying Stocks
Derivatives Markets in Developing Countries China's Markets India's Markets Other Developing Countries Summary Further Reading
317 317 319 320 320 321
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 Summary Further Reading Quiz...: Practice Questions Further Questions
323 323 326 328 330 332 334 335 335 336 336 338
Chapter 16: 16.1 16.2 16.3 16.4 16.5 16.6 16.7
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-Merton American Futures Options vs. American Spot Options Futures-Style Options Summary Further Reading Quiz Practice Questions Further Questions....
347 347 349 349 350 351 351 351 353
The Greek Letters....!.....:... Illustration Naked and Covered Positions A Stop-Loss Strategy Delta Hedging -. Theta Gamma Relationship Between Delta, Theta, and Gamma Vega Rho 7. The Realities of Hedging Scenario Analysis Extensions 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
387 387
Chapter 19: 19.1 19.2 19.3 19.4
409 409 412 414 416
Volatility Smiles Foreign Currency Options Equity Options The Volatility Term Structure and Volatility Surfaces When a Single Large Jump Is Anticipated
394 397 399 401 404 405 406 406 406 407
Contents
xiii 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 Appendix: Cash-Flow Mapping
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 1 Practice Questions Further Questions
Exotic Options and Other Nonstandard Products Exotic Options Agency Mortgage-Backed Securities Nonstandard Swaps Summary Further Reading Quiz Practice Questions Further Questions
Contents 23.3 Total Return Swaps 23.4 CDS Forwards and Options 23.5 Collateralized Debt Obligations Summary Further Reading Quiz Practice Questions Further Questions
507 509 509 513 513 514 514 515
Chapter 24: 24.1 24.2 24.3
Weather, Energy, and Insurance Derivatives Weather Derivatives..';......;.. Energy Derivatives 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 The Options Calculator The Applications Builder Major Exchanges Trading Futures and Options Table for N(x) When x < 0 Table for N(x) When x > 0 Index \
