Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options, Second Edition | by Andrew M. Chisholm | 2010 | ISBN: 9780470749371. Business Investment Books. Commodity and Bond Futures. Interest Rate and Equity Futures. Hedging with Options. Option Trading Strategies
Friday, April 29th, 2011Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options, Second Edition
by Andrew M. Chisholm
2010 (286 pages)
ISBN:9780470749371
Focusing on practical applications, case studies and examples of how the products are used to solve real-world problems, this book provides a step-by-step guide to derivatives, enabling the reader to have a solid, working understanding of key derivative products.
Derivatives Demystified—A Step-by-Step Guide to Forwards, Futures, Swaps and Options, Second Edition
Chapter 1 – The Origins and Growth of the Market
DEFINITIONS
DERIVATIVES BUILDING BLOCKS
MARKET PARTICIPANTS
SUPPORTING ORGANIZATIONS
EARLY ORIGINS OF DERIVATIVES
DERIVATIVES IN THE USA
OVERSEAS DEVELOPMENTS, INNOVATION AND EXPANSION
AN EXAMPLE OF RECENT INNOVATION: WEATHER DERIVATIVES
TEMPERATURE-LINKED DERIVATIVES
THE WILD BEAST OF FINANCE?
LESSONS FROM RECENT HISTORY
CREATIVE DESTRUCTION AND CONTAGION EFFECTS
THE MODERN OTC DERIVATIVES MARKET
THE EXCHANGE-TRADED DERIVATIVES MARKET
CHAPTER SUMMARY
Chapter 2 – Equity and Currency Forwards
INTRODUCTION
EQUITY FORWARD CONTRACT
THE FORWARD PRICE
THE FORWARD PRICE AND ARBITRAGE OPPORTUNITIES
THE FORWARD PRICE AND THE EXPECTED PAYOUT
FOREIGN EXCHANGE FORWARDS
MANAGING CURRENCY RISK
HEDGING WITH AN OUTRIGHT FORWARD FX DEAL
THE FORWARD FOREIGN EXCHANGE RATE
THE FORWARD FX RATE AND ARBITRAGE OPPORTUNITIES
FORWARD POINTS
FX SWAPS
APPLICATIONS OF FX SWAPS
CHAPTER SUMMARY
Chapter 3 – Forward Rate Agreements
INTRODUCTION
FRA CASE STUDY: CORPORATE BORROWER
RESULTS OF THE FRA HEDGE
THE FRA AS TWO PAYMENT LEGS
DEALING IN FRAS
FORWARD INTEREST RATES
CHAPTER SUMMARY
Chapter 4 – Commodity and Bond Futures
INTRODUCTION
THE MARGINING SYSTEM AND THE CLEARING HOUSE
USERS OF FUTURES CONTRACTS
COMMODITY FUTURES
FUTURES PRICES AND THE BASIS
US TREASURY BOND FUTURES
US TREASURY BOND FUTURES: DELIVERY PROCEDURES
GILT FUTURES
THE CHEAPEST-TO-DELIVER (CTD) BOND
CHAPTER SUMMARY
Chapter 5 – Interest Rate and Equity Futures
INTRODUCTION
EURODOLLAR FUTURES
TRADING EURODOLLAR FUTURES
HEDGING WITH INTEREST RATE FUTURES
INTEREST RATE FUTURES PRICES
EQUITY INDEX FUTURES
APPLICATIONS OF S&P 500 INDEX FUTURES
FT-SE 100 INDEX FUTURES CONTRACTS
ESTABLISHING NET PROFITS AND LOSSES
SINGLE STOCK FUTURES (SSFs)
CHAPTER SUMMARY
Chapter 6 – Interest Rate Swaps
INTRODUCTION
INTEREST RATE SWAP STRUCTURE
BASIC SINGLE-CURRENCY INTEREST RATE SWAP
THE SWAP AS A PACKAGE OF SPOT AND FORWARD DEALS
RATIONALE FOR THE SWAP DEAL
SWAP TERMINOLOGY AND SWAP SPREADS
TYPICAL SWAP APPLICATIONS
INTEREST RATE SWAP VARIANTS
CROSS-CURRENCY INTEREST RATE SWAPS
NET BORROWING COSTS USING A CROSS-CURRENCY SWAP
INFLATION SWAPS
CHAPTER SUMMARY
Chapter 7 – Equity and Credit Default Swaps
INTRODUCTION TO EQUITY SWAPS
EQUITY SWAP CASE STUDY
OTHER APPLICATIONS OF EQUITY SWAPS
EQUITY INDEX SWAPS
HEDGING AN EQUITY INDEX SWAP
CREDIT DEFAULT SWAPS
CREDIT DEFAULT SWAP: BASIC STRUCTURE
CREDIT DEFAULT SWAP APPLICATIONS
CREDIT SPREADS
THE CDS PREMIUM AND THE CREDIT SPREAD
PRICING MODELS FOR CDS PREMIUM
INDEX CREDIT DEFAULT SWAPS
BASKET CREDIT DEFAULT SWAPS
CHAPTER SUMMARY
Chapter 8 – Fundamentals of Options
INTRODUCTION
DEFINITIONS
TYPES OF OPTIONS
BASIC OPTION TRADING STRATEGIES
LONG CALL: EXPIRY PAYOFF PROFILE
SHORT CALL: EXPIRY PAYOFF PROFILE
LONG PUT: EXPIRY PAYOFF PROFILE
SHORT PUT: EXPIRY PAYOFF PROFILE
SUMMARY: INTRINSIC AND TIME VALUE
Chapter 9 – Hedging with Options
CHAPTER OVERVIEW
FUTURES HEDGE REVISITED
PROTECTIVE PUT
HEDGING WITH ATM PUT OPTION
COVERED CALL WRITING
EQUITY COLLAR
ZERO-COST EQUITY COLLAR
PROTECTIVE PUT WITH A BARRIER OPTION
BEHAVIOUR OF BARRIER OPTIONS
CHAPTER SUMMARY
Chapter 10 – Exchange-Traded Equity Options
INTRODUCTION
BASIC CONCEPTS
CBOE STOCK OPTIONS
UK STOCK OPTIONS ON NYSE LIFFE
CME S&P 500 INDEX OPTIONS
FT-SE 100 INDEX OPTIONS
CHAPTER SUMMARY
Chapter 11 – Currency or FX Options
INTRODUCTION
USERS OF CURRENCY OPTIONS
HEDGING FX EXPOSURES WITH OPTIONS: CASE STUDY
GRAPH OF HEDGED AND UNHEDGED POSITIONS
HEDGING WITH A ZERO-COST COLLAR
REDUCING PREMIUM ON FX HEDGES
COMPOUND OPTIONS
EXCHANGE-TRADED CURRENCY OPTIONS
CHAPTER SUMMARY
Chapter 12 – Interest Rate Options
INTRODUCTION
OTC INTEREST RATE OPTIONS
OTC INTEREST RATE OPTION CASE STUDY
HEDGING A LOAN WITH A CAPLET
INTEREST RATE CAP
INTEREST RATE COLLAR
INTEREST RATE SWAP AND SWAPTION
SUMMARY OF INTEREST RATE HEDGING STRATEGIES
EURODOLLAR OPTIONS
EURO AND STERLING INTEREST RATE OPTIONS
BOND OPTIONS
EXCHANGE-TRADED BOND OPTIONS
CHAPTER SUMMARY
Chapter 13 – Option Valuation Concepts (1)
INTRODUCTION
THE CONCEPT OF A RISKLESS HEDGE
A SIMPLE OPTION PRICING MODEL
OPTION FAIR VALUE
EXTENDING THE BINOMIAL MODEL
COST OF DYNAMIC HEDGING
THE BLACK-SCHOLES OPTION PRICING MODEL
HISTORICAL VOLATILITY
MEASURING AND USING HISTORICAL VOLATILITY
CHAPTER SUMMARY
Chapter 14 – Option Valuation Concepts (2)
INTRODUCTION
PROBLEMS WITH HISTORICAL VOLATILITY
IMPLIED VOLATILITY
BLACK-SCHOLES MODEL ASSUMPTIONS
VALUE OF A CALL OPTION
VALUE OF A PUT OPTION
EQUITY INDEX AND CURRENCY OPTIONS
PRICING INTEREST RATE OPTIONS
CHAPTER SUMMARY
Chapter 15 – Option Sensitivities—The ‘Greeks’
INTRODUCTION
DELTA (? OR d)
DELTA BEHAVIOUR
DELTA AS THE HEDGE RATIO
THE EFFECTS OF CHANGES IN DELTA
READJUSTING THE DELTA HEDGE
GAMMA (G OR ?)
GAMMA AND THE SPOT PRICE OF THE UNDERLYING
GAMMA AND TIME TO EXPIRY
THETA (T)
VEGA OR KAPPA (?)
RHO (?)
SUMMARY OF GREEKS
CHAPTER SUMMARY
Chapter 16 – Option Trading Strategies (1)
INTRODUCTION
BULL SPREAD
BULL POSITION WITH DIGITAL OPTIONS
SPOT PRICE AND CON VALUE
BEAR SPREAD
THE GREEKS FOR THE BEAR SPREAD
PUT OR BEAR RATIO SPREAD
LONG STRADDLE
LONG STRADDLE CURRENT PAYOFF PROFILE
POTENTIAL RISKS WITH A LONG STRADDLE
CHAPTER SUMMARY
Chapter 17 – Option Trading Strategies (2)
INTRODUCTION
CHOOSER OPTION
SHORT STRADDLE
SHORT STRADDLE CURRENT PAYOFF PROFILE
POTENTIAL PROFITS WITH A SHORT STRADDLE
MANAGING THE RISK ON A SHORT STRADDLE
SHORT STRANGLE
NEW WAYS OF TRADING VOLATILITY
CALENDAR OR TIME SPREAD
CHAPTER SUMMARY
Chapter 18 – Convertible and Exchangeable Bonds
INTRODUCTION
INVESTORS IN CONVERTIBLE BONDS
ISSUERS OF CONVERTIBLE BONDS
CB MEASURES OF VALUE
CONVERSION PREMIUM AND PARITY
OTHER FACTORS AFFECTING CB VALUE
CONVERTIBLE ARBITRAGE
CONVERTIBLE ARBITRAGE EXAMPLE
PROFITS AND RISKS WITH THE CB ARBITRAGE TRADE
MANDATORILY CONVERTIBLES AND EXCHANGEABLES
STRUCTURING A MANDATORILY EXCHANGEABLE (ME) BOND
CHAPTER SUMMARY
Chapter 19 – Structured Securities
INTRODUCTION
CAPITAL PROTECTION EQUITY-LINKED NOTES
EXPIRY VALUE OF 100% CAPITAL PROTECTION NOTES
100% PARTICIPATION EQUITY-LINKED NOTES
CAPPED PARTICIPATION EQUITY-LINKED NOTES
AVERAGE PRICE NOTES
LOCKING IN INTERIM GAINS: CLIQUET OPTIONS
SECURITIZATION AND CDOS
THE BASIC CDO STRUCTURE
RATIONALE FOR SECURITIZATION
SYNTHETIC CDOS
CHAPTER SUMMARY
Chapter 20 – Clearing, Settlement and Operational Risk
INTRODUCTION
RISK MANAGEMENT IN GENERAL
SETTLEMENT OF EXCHANGE-TRADED DERIVATIVES
MAJOR CLEARING HOUSES
CONFIRMATION AND SETTLEMENT OF OTC DEALS
CONTROLLING COUNTERPARTY RISK ON OTC DERIVATIVES
OPERATIONAL RISK
BEST PRACTICE IN OPERATIONAL RISK MANAGEMENT
CHAPTER SUMMARY
Appendix A – Financial Calculations
TIME VALUE OF MONEY
FUTURE VALUE (FV) WITH PERIODIC COMPOUNDING
ANNUAL EQUIVALENT RATE (AER)
PRESENT VALUE (PV) WITH PERIODIC COMPOUNDING
CONTINUOUSLY COMPOUNDED INTEREST RATES
YIELD OR RETURN ON INVESTMENT
TERM STRUCTURE OF INTEREST RATES
CALCULATING FORWARD INTEREST RATES
FORWARD RATES AND FRAs
DISCOUNT FACTORS (DFs)
PRICING A SWAP FROM THE TERM STRUCTURE
CALCULATING THE BINOMIAL VALUES
BLACK-SCHOLES MODEL
BLACK-SCHOLES EXAMPLE
BLACK-SCHOLES WITH DIVIDENDS
MEASURING HISTORIC VOLATILITY
Appendix B – Exotic Options
Appendix C – Glossary of Terms
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