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ISBN-10 ‏ : ‎ 0078034736
ISBN-13 ‏ : ‎ 978-0078034732
Author: Rangarajan Sundaram (Author), Sanjiv Das (Author)

Derivatives makes a special effort throughout the text to explain what lies behind the formal mathematics of pricing and hedging. Questions ranging from ‘how are forward prices determined?’ to ‘why does the Black-Scholes formula have the form it does?’ are answered throughout the text. The authors use verbal and pictorial expositions, and sometimes simple mathematical models, to explain underlying principles before proceeding to formal analysis. Extensive uses of numerical examples for illustrative purposes are used throughout to supplement the intuitive and formal presentations.

Table of Content:

Chapter 1: Introduction
1.1 Forward and Futures Contracts
1.2 Options
1.3 Swaps
1.4 Using Derivatives: Some Comments
1.5 The Structure of this Book
1.6 Exercises
Part One: Futures and Forwards
Chapter 2: Futures Markets
2.1 Introduction
2.2 The Functioning of Futures Exchanges
2.3 The Standardization of Futures Contracts
2.4 Closing Out Positions
2.5 Margin Requirements and Default Risk
2.6 Case Studies in Futures Markets
2.7 Exercises
Appendix 2A: Futures Trading and US Regulation: A Brief History
Appendix 2B: Contango, Backwardation, and Rollover Cash Flows
Chapter 3: Pricing Forwards and Futures I: The Basic Theory
3.1 Introduction
3.2 Pricing Forwards by Replication
3.3 Examples
3.4 Forward Pricing on Currencies and Related Assets
3.5 Forward-Rate Agreements
3.6 Concept Check
3.7 The Marked-to-Market Value of a Forward Contract
3.8 Futures Prices
3.9 Exercises
Appendix 3A: Compounding Frequency
Appendix 3B: Forward and Futures Prices with Constant Interest Rates
Appendix 3C: Rolling Over Futures Contracts
Chapter 4: Pricing Forwards and Futures II: Building on the Foundations
4.1 Introduction
4.2 From Theory to Reality
4.3 The Implied Repo Rate
4.4 Transactions Costs
4.5 Forward Prices and Future Spot Prices
4.6 Index Arbitrage
4.7 Exercises
Appendix 4A: Forward Prices with Convenience Yields
Chapter 5: Hedging with Futures and Forwards
5.1 Introduction
5.2 A Guide to the Main Results
5.3 The Cash Flow from a Hedged Position
5.4 The Case of No Basis Risk
5.5 The Minimum-Variance Hedge Ratio
5.6 Examples
5.7 Implementation
5.8 Further Issues in Implementation
5.9 Index Futures and Changing Equity Risk
5.10 Fixed-Income Futures and Duration-Based Hedging
5.11 Exercises
Appendix 5A: Derivation of the Optimal TailedHedge Ratio h **
Chapter 6: Interest-Rate Forwards and Futures
6.1 Introduction
6.2 Eurodollars and Libor Rates
6.3 Forward-Rate Agreements
6.4 Eurodollar Futures
6.5 Treasury Bond Futures
6.6 Treasury Note Futures
6.7 Treasury Bill Futures
6.8 Duration-Based Hedging
6.9 Exercises
Appendix 6A: PVBP-Based Hedging Using Eurodollar Futures
Appendix 6B: Calculating the Conversion Factor
Appendix 6C: Duration as a Sensitivity Measure
Appendix 6D: The Duration of a Futures Contract
Part Two: Options
Chapter 7: Options Markets
7.1 Introduction
7.2 Definitions and Terminology
7.3 Options as Financial Insurance
7.4 Naked Option Positions
7.5 Options as Views on Market Direction and Volatility
7.6 Exercises
Appendix 7A: Options Markets
Chapter 8: Options: Payoffs and Trading Strategies
8.1 Introduction
8.2 Trading Strategies I: Covered Calls and Protective Puts
8.3 Trading Strategies II: Spreads
8.4 Trading Strategies III: Combinations
8.5 Trading Strategies IV: Other Strategies
8.6 Which Strategies Are the Most Widely Used?
8.7 The Barings Case
8.8 Exercises
Appendix 8A: Asymmetric Butterfly Spreads
Chapter 9: No-Arbitrage Restrictions on Option Prices
9.1 Introduction
9.2 Motivating Examples
9.3 Notation and Other Preliminaries
9.4 Maximum and Minimum Prices for Options
9.5 The Insurance Value of an Option
9.6 Option Prices and Contract Parameters
9.7 Numerical Examples
9.8 Exercises
Chapter 10: Early Exercise and Put-Call Parity
10.1 Introduction
10.2 A Decomposition of Option Prices
10.3 The Optimality of Early Exercise
10.4 Put-Call Parity
10.5 Exercises
Chapter 11: Option Pricing: A First Pass
11.1 Overview
11.2 The Binomial Model
11.3 Pricing by Replication in a One-Period Binomial Model
11.4 Comments
11.5 Riskless Hedge Portfolios
11.6 Pricing Using Risk-Neutral Probabilities
11.7 The One-Period Model in General Notation
11.8 The Delta of an Option
11.9 An Application: Portfolio Insurance
11.10 Exercises
Appendix 11A: Riskless Hedge Portfolios and Option Pricing
Appendix 11B: Risk-Neutral Probabilities and Arrow Security Prices
Appendix 11C: The Risk-Neutral Probability, No-Arbitrage, and Market Completeness
Appendix 11D: Equivalent Martingale Measures
Chapter 12: Binomial Option Pricing
12.1 Introduction
12.2 The Two-Period Binomial Tree
12.3 Pricing Two-Period European Options
12.4 European Option Pricing in General n-Period Trees
12.5 Pricing American Options: Preliminary Comments
12.6 American Puts on Non-Dividend-Paying Stocks
12.7 Cash Dividends in the Binomial Tree
12.8 An Alternative Approach to Cash Dividends
12.9 Dividend Yields in Binomial Trees
12.10 Exercises
Appendix 12A: A General Representation of European Option Prices
Chapter 13: Implementing Binomial Models
13.1 Introduction
13.2 The Lognormal Distribution
13.3 Binomial Approximations of the Lognormal
13.4 Computer Implementation of the Binomial Model
13.5 Exercises
Appendix 13A: Estimating Historical Volatility
Chapter 14: The Black-Scholes Model
14.1 Introduction
14.2 Option Pricing in the Black-Scholes Setting
14.3 Remarks on the Formula
14.4 Working with the Formulae I: Plotting Option Prices
14.5 Working with the Formulae II: Algebraic Manipulation
14.6 Dividends in the Black-Scholes Model
14.7 Options on Indices, Currencies, and Futures
14.8 Testing the Black-Scholes Model: Implied Volatility
14.9 The VIX and Its Derivatives
14.10 Exercises
Appendix 14A: Further Properties of the Black-Scholes Delta
Appendix 14B: Variance and Volatility Swaps
Chapter 15: The Mathematics of Black-Scholes
15.1 Introduction
15.2 Geometric Brownian Motion Defined
15.3 The Black-Scholes Formula via Replication
15.4 The Black-Scholes Formula via Risk-Neutral Pricing
15.5 The Black-Scholes Formula via CAPM
15.6 Exercises
Chapter 16: Options Modeling: Beyond Black-Scholes
16.1 Introduction
16.2 Jump-Diffusion Models
16.3 Stochastic Volatility
16.4 GARCH Models
16.5 Other Approaches
16.6 Implied Binomial Trees/Local Volatility Models
16.7 Summary
16.8 Exercises
Appendix 16A: Program Code for Jump- Diffusions
Appendix 16B: Program Code for a Stochastic Volatility Model
Appendix 16C: Heuristic Comments on Option Pricing under Stochastic Volatility See online at www.mhh
Appendix 16D: Program Code for SimulatingGARCH Stock Prices Distributions
Appendix 16E: Local Volatility Models: The FourthPeriod of the ExampleSee online at www.mhhe.com/sd2
Chapter 17: Sensitivity Analysis: The Option “Greeks”
17.1 Introduction
17.2 Interpreting the Greeks: A Snapshot View
17.3 The Option Delta
17.4 The Option Gamma
17.5 The Option Theta
17.6 The Option Vega
17.7 The Option Rho
17.8 Portfolio Greeks
17.9 Exercises
Appendix 17A: Deriving the Black-Scholes Option Greeks
Chapter 18: Exotic Options I: Path-Independent Options
18.1 Introduction
18.2 Forward Start Options
18.3 Binary/Digital Options
18.4 Chooser Options
18.5 Compound Options
18.6 Exchange Options
18.7 Quanto Options
18.8 Variants on the Exchange Option Theme
18.9 Exercises
Chapter 19: Exotic Options II: Path-Dependent Options
19.1 Path-Dependent Exotic Options
19.2 Barrier Options
19.3 Asian Options
19.4 Lookback Options
19.5 Cliquets
19.6 Shout Options
19.7 Exercises
Appendix 19A: Barrier Option Pricing Formulae
Chapter 20: Value-at-Risk
20.1 Introduction
20.2 Value-at-Risk
20.3 Risk Decomposition
20.4 Coherent Risk Measures
20.5 Exercises
Chapter 21: Convertible Bonds
21.1 Introduction
21.2 Convertible Bond Terminology
21.3 Main Features of Convertible Bonds
21.4 Breakeven Analysis
21.5 Pricing Convertibles: A First Pass
21.6 Incorporating Credit Risk
21.7 Convertible Greeks
21.8 Convertible Arbitrage
21.9 Summary
21.10 Exercises
Appendix 21A: Octave Code for the Blended Discount Rate Valuation Tree
Appendix 21B: Octave Code for the Simplified Das-Sundaram Model
Chapter 22: Real Options
22.1 Introduction
22.2 Preliminary Analysis and Examples
22.3 A Real Options “Case Study”
22.4 Creating the State Space
22.5 Applications of Real Options
22.6 Summary
22.7 Exercises
Part Three: Swaps
Chapter 23: Interest Rate Swaps and Floating-Rate Products
23.1 Introduction
23.2 Floating-Rate Notes
23.3 Interest Rate Swaps
23.4 Uses of Swaps
23.5 Swap Payoffs
23.6 Valuing and Pricing Swaps
23.7 Extending the Pricing Arguments
23.8 Case Study: The Procter & Gamble–Bankers Trust “5/30” Swap
23.9 Case Study: A Long-Term Capital Management “Convergence Trade”
23.10 Credit Risk and Credit Exposure
23.11 Hedging Swaps
23.12 Caps, Floors, and Swaptions
23.13 The Black Model for Pricing Caps, Floors, and Swaptions
23.14 Summary
23.15 Exercises
Chapter 24: Equity Swaps
24.1 Introduction
24.2 Uses of Equity Swaps
24.3 Payoffs from Equity Swaps
24.4 Valuation and Pricing of Equity Swaps
24.5 Summary
24.6 Exercises
Chapter 25: Currency and Commodity Swaps
25.1 Introduction
25.2 Currency Swaps
25.3 Commodity Swaps
25.4 Summary
25.5 Exercises
Part Four: Interest Rate Modeling
Chapter 26: The Term Structure of Interest Rates: Concepts
26.1 Introduction
26.2 The Yield-to-Maturity
26.3 The Term Structure of Interest Rates
26.4 Discount Functions
26.5 Zero-Coupon Rates
26.6 Forward Rates
26.7 Yield-to-Maturity, Zero-Coupon Rates, and Forward Rates
26.8 Constructing the Yield-to-Maturity Curve: An Empirical Illustration
26.9 Summary
26.10 Exercises
Appendix 26A: The Raw YTM Data
Chapter 27: Estimating the Yield Curve
27.1 Introduction
27.2 Bootstrapping
27.3 Splines
27.4 Polynomial Splines
27.5 Exponential Splines
27.6 Implementation Issues with Splines
27.7 The Nelson-Siegel-Svensson Approach
27.8 Summary
27.9 Exercises
Appendix 27A: Bootstrapping by Matrix Inversion
Appendix 27B: Implementation with Exponential Splines
Chapter 28: Modeling Term-Structure Movements
28.1 Introduction
28.2 Interest-Rate Modeling versus Equity Modeling
28.3 Arbitrage Violations: A Simple Example
28.4 “No-Arbitrage” and “Equilibrium” Models
28.5 Summary
28.6 Exercises
Chapter 29: Factor Models of the Term Structure
29.1 Overview
29.2 The Black-Derman-Toy Model See online at www.mhhe.com/sd2e
29.3 The Ho-Lee Model See online at www.mhhe.com/sd2e
29.4 One-Factor Models
29.5 Multifactor Models
29.6 Affine Factor Models
29.7 Summary
29.8 Exercises
Appendix 29A: Deriving the Fundamental PDE in Factor Models
Chapter 30: The Heath-Jarrow-Morton and Libor Market Models
30.1 Overview
30.2 The HJM Framework: Preliminary Comments
30.3 A One-Factor HJM Model
30.4 A Two-Factor HJM Setting
30.5 The HJM Risk-Neutral Drifts: An Algebraic Derivation
30.6 Libor Market Models
30.7 Mathematical Excursion: Martingales
30.8 Libor Rates: Notation
30.9 Risk-Neutral Pricing in the LMM
30.10 Simulation of the Market Model
30.11 Calibration
30.12 Swap Market Models
30.13 Swaptions
30.14 Summary
30.15 Exercises
Appendix 30A: Risk-Neutral Drifts and Volatilities in HJM
Part Five: Credit Risk
Chapter 31: Credit Derivative Products
31.1 Introduction
31.2 Total Return Swaps
31.3 Credit Spread Options/Forwards
31.4 Credit Default Swaps
31.5 Credit-Linked Notes
31.6 Correlation Products
31.7 Summary
31.8 Exercises
Appendix 31A: The CDS Big Bang
Chapter 32: Structural Models of Default Risk
32.1 Introduction
32.2 The Merton (1974) Model
32.3 Issues in Implementation
32.4 A Practitioner Model
32.5 Extensions of the Merton Model
32.6 Evaluation of the Structural Model Approach
32.7 Summary
32.8 Exercises
Appendix 32A The Delianedis-Geske Model
Chapter 33: Reduced-Form Models of Default Risk
33.1 Introduction
33.2 Modeling Default I: Intensity Processes
33.3 Modeling Default II: Recovery Rate Conventions
33.4 The Litterman-Iben Model
33.5 The Duffie-Singleton Result
33.6 Defaultable HJM Models
33.7 Ratings-Based Modeling: The JLT Model
33.8 An Application of Reduced-Form Models: Pricing CDS
33.9 Summary
33.10 Exercises
Appendix 33A Duffie-Singleton in Discrete Time
Appendix 33B Derivation of the Drift-Volatility Relationship
Chapter 34: Modeling Correlated Default
34.1 Introduction
34.2 Examples of Correlated Default Products
34.3 Simple Correlated Default Math
34.4 Structural Models Based on Asset Values
34.5 Reduced-Form Models
34.6 Multiperiod Correlated Default
34.7 Fast Computation of Credit Portfolio Loss Distributions without Simulation
34.8 Copula Functions
34.9 Top-Down Modeling of Credit Portfolio Loss
34.10 Summary
34.11 Exercises
Part Six: Computation
Chapter 35: Derivative Pricing with Finite Differencing
35.1 Introduction
35.2 Solving Differential Equations
35.3 A First Approach to Pricing Equity Options
35.4 Implicit Finite Differencing
35.5 The Crank-Nicholson Scheme
35.6 Finite Differencing for Term-Structure Models
35.7 Summary
35.8 Exercises
Chapter 36: Derivative Pricing with Monte Carlo Simulation
36.1 Introduction
36.2 Simulating Normal Random Variables
36.3 Bivariate Random Variables
36.4 Cholesky Decomposition
36.5 Stochastic Processes for Equity Prices
36.6 ARCH Models
36.7 Interest-Rate Processes
36.8 Estimating Historical Volatility for Equities
36.9 Estimating Historical Volatility for Interest Rates
36.10 Path-Dependent Options
36.11 Variance Reduction
36.12 Monte Carlo for American Options
36.13 Summary
36.14 Exercises
Chapter 37: Using Octave
37.1 Some Simple Commands
37.2 Regression and Integration
37.3 Reading in Data, Sorting, and Finding
37.4 Equation Solving
37.5 Screenshots
Bibliography
Name Index
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
R
S
T
V
W
X
Y
Z
Subject Index
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
X
Y

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