Derivatives Markets

979 Pages·2012·7.58 MB·English

Derivatives Markets
ThePearsonSeriesinFinance
Bekaert/Hodrick Hull
InternationalFinancialManagement FundamentalsofFuturesandOptionsMarkets
Berk/DeMarzo Hull
CorporateFinance* Options,Futures,andOtherDerivatives
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IntroductiontoRiskManagementandInsurance Marthinsen
RiskTakers:UsesandAbusesofFinancialDerivatives
Eiteman/Stonehill/Moffett
MultinationalBusinessFinance McDonald
DerivativesMarkets
Fabozzi
BondMarkets:AnalysisandStrategies McDonald
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Fabozzi/Modigliani
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Derivatives Markets
THIRD EDITION
Robert L. McDonald
Northwestern University
Kellogg School of Management
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LibraryofCongressCataloging-in-PublicationData
McDonald,RobertL.(RobertLynch)
Derivativesmarkets/RobertL.McDonald.—3rded.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN-13:978-0-321-54308-0(hardcover)
ISBN-10:0-321-54308-4(hardcover)
1.Derivativesecurities. I.Title.
HG6024.A3M394 2013
332.64(cid:2)57—dc23 2012029875
10 9 8 7 6 5 4 3 2 1
ISBN10:0-321-54308-4
ISBN13:978-0-321-54308-0
For Irene, Claire, David, and Henry
This page intentionally left blank
Brief
Contents
Preface xxi
1 Introduction to Derivatives 1
PART ONE
Insurance, Hedging, and Simple Strategies 23
2 An Introduction to Forwards and Options 25
3 Insurance, Collars, and Other Strategies 61
4 Introduction to Risk Management 89
PART TWO
Forwards, Futures, and Swaps 123
5 Financial Forwards and Futures 125
6 Commodity Forwards and Futures 163
7 Interest Rate Forwards and Futures 195
8 Swaps 233
PART THREE
Options 263
9 Parity and Other Option Relationships 265
10 Binomial Option Pricing: Basic Concepts 293
11 Binomial Option Pricing: Selected Topics 323
12 The Black-Scholes Formula 349
13 Market-Making and Delta-Hedging 381
14 Exotic Options: I 409
vii
viii BriefContents
PART FOUR
Financial Engineering and Applications 435
15 Financial Engineering and Security Design 437
16 Corporate Applications 469
17 Real Options 509
PART FIVE
Advanced Pricing Theory and Applications 543
18 The Lognormal Distribution 545
19 Monte Carlo Valuation 573
20 Brownian Motion and Itoˆ’s Lemma 603
21 The Black-Scholes-Merton Equation 627
22 Risk-Neutral and Martingale Pricing 649
23 Exotic Options: II 683
24 Volatility 717
25 Interest Rate and Bond Derivatives 751
26 Value at Risk 789
27 Credit Risk 815
Appendix A The Greek Alphabet 851
Appendix B Continuous Compounding 853
Appendix C Jensen’s Inequality 859
Appendix D An IntroductiontoVisual Basic for Applications 863
Glossary 883
References 897
Index 915
Contents
Preface xxi PART ONE
Insurance, Hedging, and Simple
Strategies 23
Chapter 1
Introduction to Derivatives 1
Chapter 2
1.1 WhatIsaDerivative? 2
An Introduction to Forwards and
1.2 AnOverviewofFinancialMarkets 2
TradingofFinancialAssets 2 Options 25
MeasuresofMarketSizeandActivity 4 2.1 ForwardContracts 25
StockandBondMarkets 5
ThePayoffonaForwardContract 29
DerivativesMarkets 6
Graphing the Payoff on a Forward
1.3 TheRoleofFinancialMarkets 9 Contract 30
FinancialMarketsandtheAverages 9 Comparing a Forward and Outright
Risk-Sharing 10 Purchase 30
1.4 TheUsesofDerivatives 11 Zero-CouponBondsinPayoffandProfit
UsesofDerivatives 11 Diagrams 33
PerspectivesonDerivatives 13 CashSettlementVersusDelivery 34
Financial Engineering and Security CreditRisk 34
Design 14 2.2 CallOptions 35
1.5 Buying and Short-Selling Financial OptionTerminology 35
Assets 14 PayoffandProfitforaPurchasedCall
Transaction Costs and the Bid-Ask Option 36
Spread 14 Payoff and Profit for a Written Call
WaystoBuyorSell 15 Option 38
Short-Selling 16 2.3 PutOptions 41
TheLeaseRateofanAsset 18 Payoff and Profit for a Purchased Put
RiskandScarcityinShort-Selling 18 Option 41
ChapterSummary 20 Payoff and Profit for a Written Put
FurtherReading 20 Option 42
Problems 20 The“Moneyness”ofanOption 44
ix