Options, Futures, and Other Derivatives / Edition 5 available in Hardcover
- Pub. Date:
- Pearson Education
Table of Contents1. Introduction.
2. Mechanics of Futures Markets.
3. Determination of Forward and Futures Prices.
4. Hedging Strategies Using Futures.
5. Interest Rate Markets.
7. Mechanics of Options Markets.
8. Properties of Stock Options.
9. Trading Strategies Involving Options.
10. Introduction to Binomial Trees.
11. A Model of the Behavior of Stock Prices.
12. The Black-Scholes Model.
13. Options on Stock Indices, Currencies, and Futures.
14. The Greek Letters.
15. Volatility Smiles.
16. Value at Risk.
17. Estimating Volatilities and Correlations.
18. Numerical Procedures.
19. Exotic Options.
20. More on Models and Numerical Procedures.
21. Martingales and Measures.
22. Interest Rate Derivatives: The Standard Market Models.
23. Interest Rate Derivatives: Models of the Short Rate.
24. Interest Rate Derivatives: More Advanced Models.
25. Swaps Revisited.
26. Credit Risk.
27. Credit Derivatives.
28. Real Options.
29. Insurance, Weather, and Energy Derivatives.
30. Derivatives Mishaps and What We Can Learn from Them.
Like earlier editions, the book serves several markets. It is appropriate for graduate courses in business, economics, and financial engineering. It can be used on advanced undergraduate courses when students have good quantitative skills. Also, many practitioners who want to acquire a working knowledge of how derivatives can be analyzed find the book useful.
One of the key decisions that must be made by an author who is writing in the area of derivatives concerns the use of mathematics. If the level of mathematical sophistication is too high, the material is likely to be inaccessible to many students and practitioners. If it is too low, some important issues will inevitably be treated in a rather superficial way. I have tried to be particularly careful about the way I use both mathematics and notation in the book. Nonessential mathematical material has been either eliminated or included in end-of-chapter appendices. Concepts that are likely to be new to many readers have been explained carefully, and many numerical examples have been included.
The book covers both derivatives markets and risk management. It assumes that the reader has taken an introductory course in finance and an introductory course in probability and statistics. No prior knowledge of options, futures contracts, swaps, and so on is assumed. It is nottherefore necessary for students to take an elective course in investments prior to taking a course based on this book. There are many different ways the book can be used in the classroom. Instructors teaching a first course in derivatives may wish to spend most time on the first half of the book. Instructors teaching a more advanced course will find that many different combinations of the chapters in the second half of the book can be used. I find that the material in Chapters 29 and 30 works well at the end of either an introductory or an advanced course.
Material has been updated and improved throughout the book. The changes in this edition include:
- A new chapter on the use of futures for hedging (Chapter 4). Part of this material was previously in Chapters 2 and 3. The change results in the first three chapters being less intense and allows hedging to be covered in more depth.
- A new chapter on models and numerical procedures (Chapter 20). Much of this material is new, but some has been transferred from the chapter on exotic options in the fourth edition.
- A new chapter on swaps (Chapter 25). This gives the reader an appreciation of the range of nonstandard swap products that are traded in the over-the-counter market and discusses how they can be valued.
- There is an extra chapter on credit risk. Chapter 26 discusses the measurement of credit risk and credit value at risk while Chapter 27 covers credit derivatives.
- There is a new chapter on real options (Chapter 28). There is a new chapter on insurance, weather, and energy derivatives (Chapter 29).
- There is a new chapter on derivatives mishaps and what we can learn from them (Chapter 30).
- The chapter on martingales and measures has been improved so that the material flows better (Chapter 21).
- The chapter on value at risk has been rewritten so that it provides a better balance between the historical simulation approach and the model-building approach (Chapter 16).
- The chapter on volatility smiles has been improved and appears earlier in the book. (Chapter 15).
- The coverage of the LIBOR market model has been expanded (Chapter 24).
- One or two changes have been made to the notation. The most significant is that the strike price is now denoted by K rather than X.
- Many new end-of-chapter problems have been added.
A new version of DerivaGem (Version 1.50) is released with this book. This consists of two Excel applications: the Options Calculator and the Applications Builder. The Options Calculator consists of the software in the previous release (with minor improvements). The Applications Builder consists of a number of Excel functions from which users can build their own applications. It includes a number of sample applications and enables students to explore the properties of options and numerical procedures more easily. It also allows more interesting assignments to be designed.
The software is described more fully at the end of the book. Updates to the software can be downloaded from my website
Several hundred PowerPoint slides can be downloaded from my website. Instructors who adopt the text are welcome to adapt the slides to meet their own needs.
Answers to Questions
As in the fourth edition, end-of-chapter problems are divided into two groups: "Questions and Problems" and "Assignment Questions". Solutions to the Questions and Problems are in Options, Futures, and Other Derivatives: Solutions Manual, which is published by Prentice Hall and can be purchased by students. Solutions to Assignment Questions are available only in the Instructors Manual.