Derivatives and risk management

✍ Scribed by Jayanth Rama Varma

• Publisher: Tata McGraw-Hill
• Year: 2008
• Tongue: English
• Leaves: 430
• Category: Library

✦ Table of Contents

Cover
Half Title
About the Author
Title Page
Copyright
Preface
Acknowledgements
Contents
Chapter 1. INTRODUCTION TO DERIVATIVES
1.1 What are Derivatives and What Do they Do?
1.2 Development and Growth of Derivative Markets
1.3 Types of Derivatives
1.4 Uses of Derivatives
1.5 Derivative Disasters
1.6 Overview of the Book
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 2. FORWARD AND FUTURES MARKETS
2.1 Forward Contracts
2.2 Differences between Forward and Spot Market
2.3 Futures Contracts
2.4 Futures Market Contract Design
2.5 Physical Settlement, Delivery Options and Cash Settlement
2.6 Futures Markets
2.7 Global Futures Market Size
2.8 Commodity Futures
2.9 Individual Equity Futures
2.10 Stock Index Futures
2.11 Currency Futures
2.12 Futures on Government Bonds, Notes and Bills
2.13 Cash Settled Interest Rate Futures
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 3. COST OF CARRY MODEL FOR FUTURES AND FORWARDS
3.1 A Simple Example
3.2 Cash and Carry Arbitrage
3.3 Reverse Cash and Carry Arbitrage
3.4 The Cost of Carry Model
3.5 The Cost of Carry Model with Continuous Compounding
3.6 Consumption Assets and Convenience Yields
3.7 Value of a Forward Contract
3.8 Relation between Futures and Expected Spot Prices
3.9 Backwardation and Contango
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 4. RISK MANAGEMENT USING FUTURES AND FORWARDS
4.1 Perfect Hedges and Known Exposures
4.2 Basis Risk and Optimal Hedge Ratio
4.3 Measuring Risk Exposure
4.4 Use of Betas in Index Future Hedges
4.5 Use of Modified Duration in Interest Rate Hedges
4.6 Hedging Currency Risk of Equity Positions
4.7 Tailing the Hedge
4.8 Rolling Hedges
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 5. HOW AND WHY DO FIRMS HEDGE?
5.1 Costs and Benefits of Hedging
5.2 Hedging Instruments
5.3 Non-financial Hedges
5.4 Risk Management Structures and Policies
Chapter Summary
Suggestions for Further Reading
Cases
Chapter 6. OPTIONS AND THEIR PAYOFFS
6.1 European and American Calls and Puts
6.2 Payoff and Profit Diagrams
6.3 Options as Insurance
6.4 Determinants of Option Price
6.5 Bounds on Option Price
6.6 Put Call Parity
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 7. OPTION MARKETS
7.1 Exchange Traded Options and OTC Options
7.2 Options Market Contract Design
7.3 Option Exercise, Settlement, and Assignment
7.4 Options Markets
7.5 Commodity Options
7.6 Stock Index Options
7.7 Individual Equity Options
7.8 Currency Options
7.9 Interest Rate and Bond Options
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 8. RISK NEUTRAL VALUATION
8.1 Risk Adjusted Discount Rates and Certainty Equivalents
8.2 Risk-neutral Probabilities
8.3 Cost of Carry Model Revisited
8.4 Expected Utility Derivation of Risk-neutral Probabilities
8.5 No Arbitrage and Risk-neutral Probabilities—Single Period
8.6 No Arbitrage and Risk-neutral Probabilities—Multiple Periods
8.7 Risk-neutral Valuation in Continuous Time
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 9. THE BINOMIAL OPTION PRICING MODEL
9.1 Single Step Binomial
9.2 Option Delta and Delta Hedging
9.3 Multi Period Binomial Trees
9.4 Option Deltas in the Multi Period Model
9.5 Matching Volatility and Risk-free Rate
9.6 More Examples of Binomial Trees
9.7 Binomial Model for American Options
9.8 Binomial Trees and the Log Normal Distribution
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 10. THE BLACK-SCHOLES OPTION PRICING MODEL
10.1 The Model of Stock Price Behaviour
10.2 The Log Normal Distribution
10.3 The Risk Neutral Log Normal Distribution
10.4 The Black-Scholes Formula
10.5 Black-Scholes Model With Dividends
10.6 Options on Stock Indices
10.7 Options on Currencies
10.8 Options on Futures
10.9 Options on Commodities
10.10 American Options
10.11 Appendix on Log Normal Distribution
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 11. USES OF OPTIONS: SIMPLE OPTION STRATEGIES
11.1 Buying Options Instead of Trading Forwards or Spot
11.2 Range Forwards
11.3 Bull and Bear Spreads
11.4 Covered Option Writing
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 12. THE GREEKS OF THE BLACK-SCHOLES MODEL
12.1 Delta
12.2 Gamma
12.3 Theta
12.4 The Black-Scholes Equation
12.5 Vega
12.6 RHO
12.7 Numerical Example of Option Greeks
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 13. COMPLEX OPTION STRATEGIES
13.1 Straddles
13.2 Strangles
13.3 Butterfly Spreads
13.4 Greeks of Option Strategies
13.5 Calendar Spreads
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 14 VOLATILITIES AND IMPLIED VOLATILITIES
14.1 Historical Volatility
14.2 Exponentially Weighted Moving Averages
14.3 Garch Method
14.4 Implied Volatility
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 15. VOLATILITY SMILES AND IMPLIED RISK NEUTRAL DISTRIBUTIONS
15.1 Revisiting the Black-Scholes Formula
15.2 Volatility Smile and the Risk-neutral Distribution
15.3 Option Combinations and Volatility Smiles
15.4 Term Structure of Volatility
15.5 Volatility Surfaces
15.6 Implications of Stochastic Volatility
15.7 Implications of Volatility Surfaces for Hedging and Option Greeks
Chapter Summary
Suggestions for Further Reading
Additional Suggestions for Further Reading
Problems and Questions
Chapter 16. EXOTIC OPTIONS
16.1 Digital or Binary Options
16.2 Barrier Options
16.3 Asian Options
16.4 Chooser Options
16.5 Compound Options
16.6 Other Exotic Options
Chapter Summary
Suggestions for Further Reading
Problems and Questions
Chapter 17. WARRANTS AND CONVERTIBLES
17.1 Warrants
17.2 The Warrant Valuation Model
17.3 Employee Stock Options
17.4 Convertible Bonds as Straight Bonds Plus Warrants
17.5 Convertible Bonds: Risk Neutral Valuation of All Cash Flows
17.6 Convertible Bond Valuation with Interest Rate Uncertainty
Chapter Summary
Suggestions for Further Reading
Cases
Chapter 18. INTEREST RATE AND CURRENCY SWAPS
18.1 The Swap Markets
18.2 Using Swaps to Hedge Interest Rate and Currency Risk
18.3 Interest Rate Swap As Exchange of Floating Rate Bond for Fixed Rate Bond
18.4 Valuing Floating Rate Bonds
18.5 Valuing Fixed Rate Bonds using Yield to Maturity (YTM)
18.6 Zero Rates and Forward Rates
18.7 Interest Rate Swap as Bundle of Forward Contracts
18.8 Currency Swaps as Exchange of Bonds
18.9 Currency Swaps as Bundle of Forward Contracts
Chapter Summary
Suggestions for Further Reading
Case on Swaps
Chapter 19. CAPS, FLOORS AND SWAPTIONS
19.1 Caps and Floors
19.2 The Libor Market Model (LMM) for Cap and Floor Valuation
19.3 Caplet and Cap Volatilities
19.4 Swaptions and Callable Bonds
19.5 The Swap Market Model for Valuing Swaptions
19.6 Swaption Volatilities
19.7 Risk Neutral Valuation of Interest Rate Derivatives
19.8 Reconciling Lognormality Assumption for Caps and Swaptions
Chapter Summary
Suggestions for Further Reading
Chapter 20. DERIVATIVE ACCOUNTING
20.1 Introduction to Derivatives Accounting
20.2 Derivatives and Fair Value Accounting
20.3 Hedge Accounting
20.4 Requirements for Hedge Accounting
Chapter Summary
Suggestions for Further Reading
Cases
Chapter 21. CORPORATE RISK MANAGEMENT
21.1 Risk Management and Shareholder Value
21.2 Lenders, Employees and Other Stakeholders
21.3 Planning and Control Reasons for Hedging
21.4 Financial Distress
21.5 Cash Flow Hedges and Value Hedges
21.6 Capital Structure and Hedging
21.7 Is the Risk Department a Profit Centre or a Cost Centre?
Chapter Summary
Suggestions for Further Reading
Cases
Chapter 22. RISK MANAGEMENT IN FINANCIAL INSTITUTIONS
22.1 Value at Risk
22.2 Historical Simulation
22.3 Delta-Normal Approximation
22.4 Delta-Gamma Approximation
22.5 Monte Carlo Simulation
22.6 Modelling and Estimating Correlations
22.7 Back Testing
22.8 Stress Testing
22.9 Internal Control Systems
22.10 Regulatory Considerations
Chapter Summary
Suggestions for Further Reading
Index