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- Herausgeber: John Wiley & Sons
- Kategorie: Wissenschaft und neue Technologien
- Sprache: Englisch
A step-by-step approach to the mathematical financial theory and quantitative methods needed to implement and apply state-of-the-art valuation techniques
Written as an accessible and appealing introduction to financial derivatives, Elementary Financial Derivatives: A Guide to Trading and Valuation with Applications provides the necessary techniques for teaching and learning complex valuation techniques. Filling the current gap in financial engineering literature, the book emphasizes an easy-to-understand approach to the methods and applications of complex concepts without focusing on the underlying statistical and mathematical theories.
Organized into three comprehensive sections, the book discusses the essential topics of the derivatives market with sections on options, swaps, and financial engineering concepts applied primarily, but not exclusively, to the futures market. Providing a better understanding of how to assess risk exposure, the book also includes:
- A wide range of real-world applications and examples detailing the theoretical concepts discussed throughout
- Numerous homework problems, highlighted equations, and Microsoft® Office Excel® modules for valuation
- Pedagogical elements such as solved case studies, select answers to problems, and key terms and concepts to aid comprehension of the presented material
- A companion website that contains an Instructor’s Solutions Manual, sample lecture PowerPoint® slides, and related Excel files and data sets
Elementary Financial Derivatives: A Guide to Trading and Valuation with Applications is an excellent introductory textbook for upper-undergraduate courses in financial derivatives, quantitative finance, mathematical finance, and financial engineering. The book is also a valuable resource for practitioners in quantitative finance, industry professionals who lack technical knowledge of pricing options, and readers preparing for the CFA exam.
Jana Sacks, PhD, is Associate Professor in the Department of Accounting and Finance at St. John Fisher College in Rochester, New York. A member of The American Finance Association, the National Association of Corporate Directors, and the International Atlantic Economic Society, Dr. Sack’s research interests include risk management, credit derivatives, pricing, hedging, and structured finance.
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Seitenzahl: 239
Veröffentlichungsjahr: 2015
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CONTENTS
Cover
Title Page
Copyright
Dedication
Preface
Acknowledgments
Table of Figures
About the Companion Websites
Chapter 1: Derivative Instruments: Concepts and Definitions
1.1 Key Derivative Instruments Definitions
1.2 The Role, Risks, and Benefits of Derivatives Markets
1.3 Arbitrage
1.4 Miscellaneous
Chapter 2: Forwards And Futures
2.1 Futures Fundamentals
2.2 Forward Rate Agreements
2.3 Currency Forwards
Chapter 3: Swaps
3.1 Swaps Fundamentals
3.2 Equity, Currency, And Fx Swaps
3.3 Other Yield Curve-Dependent Swaps
Chapter 4: Options
4.1 Options Fundamentals
4.2 Pricing
4.3 Greeks
4.4 Volatility
4.5 Exotics
Literature
Index
End User License Agreement
List of Illustrations
FIGURE 2.1
FIGURE 2.2
FIGURE 2.3
FIGURE 2.4
FIGURE 2.5
FIGURE 2.6
FIGURE 2.7
FIGURE 2.8
FIGURE 2.9
FIGURE 2.10
FIGURE 2.11
FIGURE 2.12
FIGURE 2.13
FIGURE 2.14
FIGURE 2.15
FIGURE 2.16
FIGURE 2.17
FIGURE 2.18
FIGURE 2.19
FIGURE 2.20
FIGURE 2.21
FIGURE 2.22
FIGURE 2.23
FIGURE 2.24
FIGURE 2.25
FIGURE 2.26
FIGURE 3.1
FIGURE 3.2
FIGURE 3.3
FIGURE 3.4
FIGURE 3.5
FIGURE 3.6
FIGURE 3.7
FIGURE 3.8
FIGURE 3.9
FIGURE 3.10
FIGURE 3.11
FIGURE 3.12
FIGURE 3.13
FIGURE 3.14
FIGURE 3.15
FIGURE 3.16
FIGURE 3.17
FIGURE 3.18
FIGURE 4.1
FIGURE 4.2
FIGURE 4.3
FIGURE 4.4
FIGURE 4.5
FIGURE 4.6
FIGURE 4.7
FIGURE 4.8
FIGURE 4.9
FIGURE 4.10
FIGURE 4.11
FIGURE 4.12
FIGURE 4.13
FIGURE 4.14
FIGURE 4.15
FIGURE 4.16
FIGURE 4.17
FIGURE 4.18
FIGURE 4.19
FIGURE 4.20
FIGURE 4.21
FIGURE 4.22
FIGURE 4.23
FIGURE 4.24
FIGURE 4.25
FIGURE 4.26
FIGURE 4.27
FIGURE 4.28
FIGURE 4.29
FIGURE 4.30
FIGURE 4.31
FIGURE 4.32
FIGURE 4.33
FIGURE 4.34
FIGURE 4.35
FIGURE 4.36
FIGURE 4.37
FIGURE 4.38
FIGURE 4.39
FIGURE 4.40
FIGURE 4.41
FIGURE 4.42
Guide
Cover
Table of Contents
Begin Reading
Chapter 1
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Elementary Financial Derivatives
A Guide to Trading and Valuation with Applications
By Jana Sacks Ph.D.
Copyright © 2016 by John Wiley & Sons, Inc. All rights reserved
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com.
Library of Congress Cataloging-in-Publication Data
Sacks, Jana.
Elementary financial derivatives : a guide to trading and valuation with applications / Jana Sacks, Ph.D.
pages cm
Includes bibliographical references and index.
ISBN 978-1-119-07675-9 (hardback)
1. Derivative securities. I. Title.
HG6024.A3.S2297 2015
332.64′57–dc23
2015024277
ISBN: 9781119076759
Dedication
To Jonathan
Preface
This book is written to be an easy-to-understand introductory textbook featuring hands-on application of presented theoretical concepts. The intention of the book is to introduce the subject of financial derivatives in an accessible and appealing way. The readers will be learning by doing. In the academic environment, the book is intended to be a textbook for an introductory course in financial derivatives.
The purpose of this book is essentially its focus on simplicity. Financial derivatives are often regarded as financial instruments that are just too complex to comprehend and individual investors tend to shy away. At the same time, market professionals state that financial derivatives trades now constitute about 40% of the overall alternative asset markets. This book offers explanations of complex concepts in the simplest possible form with hands-on applications through problems, case studies, and Microsoft® Office Excel®-based modules for valuation.
The book covers all the essential parts of the derivatives market. Aside from a section on options, it features sections on swaps and financial engineering concepts applied primarily, but not exclusively, to the futures markets.
The target audience is anyone who is interested in learning about financial derivatives in a relatively short time, such as individuals preparing for the CFA exam. I envision the readership anywhere from business school students—online and in-class—to individual investors interested in trading options using online trading accounts. After reading this book, investors will be able to better understand and assess their risk exposure and decide whether it is indeed one they are prepared to take.
The material in this book is organized into three parts: forwards and futures, swaps, and options. There is an Instructor's Manual available on the book's companion website hosted by John Wiley & Sons, which includes all solutions to end-of-chapter problems. Instructors may also obtain PowerPoint® slides from the website.
Jana Sacks
Acknowledgments
There are a number of people I would like to thank for their encouragement, advice, and suggestions. I would like to thank my academic colleagues at St. John Fisher College; my mentors—recognizing the late Dr. Salih Neftci in particular; industry practitioners—Katrina Bell and Ira Jersey; and my research assistants—Garrett MacDonald and Daniela Stefanovski.
I would also like to extend my special thanks to my wonderful family including my canine “writing companions”—Moses and Buddy.
About the Companion Websites
This book is accompanied by both Instructor and Student companion websites, which are available via the book's page on www.wiley.com.
The Instructor website includes:
Instructors' Solutions Manual
PowerPoint® slides by chapter
The Student website includes:
R and Microsoft® Office Excel® data sets
1Derivative Instruments: Concepts and Definitions
1.1 Key Derivative Instruments Definitions
Forwards and Futures
A forward contract is a contract between two parties. It states that one of the two parties is to buy something from the other at a later date at a price agreed upon today.
A futures contract is also a contract between two parties. One party is bound to buy something from the other at a later date at a price agreed upon today, subject to a daily settlement of gains and losses and guaranteed against the risk that either party might default.
Swaps
A swap is a contract in which two parties agree to exchange a series of cash flows at predetermined dates over a period of time.
Options
Options are contracts made between two parties that give one party, the buyer, the right to buy or sell an asset from or to the other party, the seller, at a later date and price agreed upon today.
Positions
All derivative contracts have essentially two basic positions: long and short. Long position refers to buying, whereas short position refers to selling. The exact positions, rights, and obligations stemming from them differ for different types of financial derivatives.
1.2 The Role, Risks, and Benefits of Derivatives Markets
Derivative instruments are securities that derive their value from an underlying asset. They offer investors global diversification in financial instruments and currencies, and promise to generate returns that are superior to traditional investments. Investors in derivatives can profit from changes in interest rates and equity markets around the world, currency exchange rate shifts, and changes in global supply and demand for various types of commodities such as precious and industrial metals, oil, and grains.
There are two widely recognized benefits of derivative instruments: price discovery and risk management.
Price Discovery
How do we determine prices? Prices depend on a continuous flow of information from around the world and require the highest possible degree of transparency. A broad range of various elements constantly have an impact on supply and demand for assets. Information flow concerning political situations, climatic and environmental conditions, debt situation, and societal behavioral patterns constantly impacts the price of a commodity, such as wheat, soybeans, and oil. This process is known as price discovery.
Futures markets in particular are a useful tool to help discover prices. Futures markets are considered a primary means for determining the spot price of an asset. The futures market is more active than the spot market; hence, information taken from it is often considered more reliable. Futures markets' underlying assets can be geographically quite dispersed and hence have more than one spot price in existence. The price of the contract with the shortest time to expiration often serves as a proxy for the underlying spot price of an asset.
Options are also relevant in price discovery, mostly in the way the market participants view markets' volatility. If investors think that the markets will be volatile, the option premiums (i.e., their purchase prices) will spike higher.
Risk Management
Companies and investors today use derivatives as tools in their strategies designed to enable them to manage risk exposures more effectively. Risk management is about both hedging and speculation. At times, investors want to increase their risk exposure to gain greater expected return. At other times, investors will want to protect themselves from undesirable risk exposure. Risk management has a very important purpose for the derivatives market. It is essentially the process of recognizing the desired level of risk, detecting the actual level of risk, and altering the actual to equal the desired.
Derivative securities represent additional risks to investors. Many of those risks are heightened by investors perhaps not fully understanding the proper use of said instruments. For example, options offer the potential for vast gains and losses. While the potential for gain is appealing, their complexity makes them suitable for only sophisticated investors with a high degree of risk tolerance.
Professional traders and money managers can use derivatives effectively. They are aware and trained to work with risk exposures stemming from (1) expiration time of the instrument, (2) market timing, (3) market direction, (4) market volatility, and (5) transaction costs.
Derivative instruments have expiration dates. As each day passes, the expiration date approaches and investors lose more and more “time value”. In the case of options, that alone makes an option's value decrease. In order to make money with most derivatives, investors need to accurately predict the direction in which the market will move. It is also very beneficial if they can predict the extent of the move within a specific amount of time.
Operational Advantages
Derivative securities are associated with a number of operational advantages. They offer lower transaction costs and greater liquidity. They are generally easier to sell short and contribute to increasing market efficiency.
Criticisms
It probably comes as no surprise that derivative instruments have been linked with periods of financial distress. Unlike financial markets, derivatives markets neither create nor destroy wealth—they merely provide means to transfer risk. Additionally, they enable speculation and as a result are often compared with gambling. They also enable greater leverage, which we'll see more clearly in the following chapters.
1.3 Arbitrage
Spot prices for the exact same commodities may vary around the world according to the place of trading. This represents an arbitrage opportunity. It exists whenever similar assets are sold at different price levels. This opportunity allows an investor to realize a profit with zero risk and, at times, limited funds, by selling the asset in the high-priced market and simultaneously buying it in the inexpensive market. Investors will continue buying and selling until the asset price reaches an equilibrium in both markets. This process of achieving equilibrium through buying and selling is referred to as the Law of One Price. In reality, fairly efficient markets have very little to no arbitrage opportunities. If they do, market participants quickly eliminate them.
Case Study 1.3-1
Suppose that on NYMEX crude oil is trading at $65/barrel and on another exchange (B) oil is trading at $70/barrel.
If you buy crude oil on NYMEX and simultaneously sell it on another exchange, you can net a profit of $5 without any risk or any outlay of cash. As people continue to buy on NYMEX, the price of crude will increase and all of the selling of oil on exchange B will force the price down. This will continue until equilibrium is reached. At equilibrium, the market is efficient. Thus, this is how arbitrage works to make the marketplace more efficient.
Problems
1.3-1.
How can market participants eliminate arbitrage opportunities? Discuss the effect of arbitrage on market efficiency.
1.4 Miscellaneous
Short Selling
Short selling refers to a strategy where an investor is selling an asset that he/she doesn't own. The investor anticipates the asset price falling and wants to take an advantage of the price difference. In order to sell something we don't own, we have to temporarily borrow it. Thus, we borrow the asset from a broker, with a promise to deliver the shares back to him at a later date. When we decide to close out the position, we buy back the underlying asset, hopefully for less than what we sold it for. That way we can unwind the debt to the broker and realize a gain.
Repos
In repurchase agreements (repos), the seller agrees to sell an asset to a buyer and repurchase the asset sometime in the future for an agreed upon price (higher than the sell price). Repos are used as a way to borrow (usually short term) at a relatively low cost. The underlying asset serves as collateral.
Discount Factor Calculations in Different Markets
Notation
B
t
,
T
Discount factor
T
Maturity time
t
Any time prior to maturity time
r
Interest rate (i.e., yield)
Bond equivalent yield (U.S. bond markets)
Money market yield (money markets)
Discount rates (commercial paper and treasury bill markets)
Eurodollar Time Deposits
Eurodollar time deposits are deposits held outside of the United States but denominated in U.S. dollars. They are time deposits denominated in USD held either with a foreign bank or with a subsidiary of a U.S. bank.
They have the “Euro” part in the name because they refer to deposits that were in the past held mostly by European banks, and thus became known as “Eurodollars.” Now they are part of the enormous global foreign exchange market. In 2006, China became the largest holder of foreign exchange reserves and most of those reserves are denominated in U.S. currency. Today, such deposits continue to be referred to as “Eurodollars,” regardless of the location.
Thus, Eurodollars are short-term obligations to pay dollars and they are obligations of banking offices located outside the United States. Eurodollar time deposits are designed for corporate, commercial, institutional, and high-net-worth investors who want a short-term, high-yield money market investment.
The interest paid for these dollar deposits is generally higher than that for funds deposited in U.S. banks because the foreign banks are riskier—they will not be supported by the U.S. government upon default. Furthermore, they may pay higher rates of interest because they are not regulated by the U.S. government. They are backed by the full faith and credit of the local domestic bank and are issued by its offshore branch.
Libor
Libor, which stands for London Interbank Offered Rate, is the interest rate paid on interbank deposits in the international money markets (also called the Eurocurrency markets). Because Eurocurrency deposits priced at Libor are almost continually traded in highly liquid markets, Libor is commonly used as a benchmark for short-term interest rates in setting loan and deposit rates and as the floating rate on an interest rate swap. It's considered one of the most important barometers of the international cost of money. Libor is quoted on a one-month, three-month, six-month, or yearly basis.
Euribor
Euribor (Euro Interbank Offered Rate) is similar to Libor, except it uses euros and euro deposits in the lending and borrowing between banks, instead of dollars. Euribor is the rate at which euro interbank term deposits are offered by one bank to another. It is compiled in Frankfurt, Germany, and published by the European Central Bank. Euribor is the benchmark rate of the large euro money market and is sponsored by the European Banking Federation, which represents the interests of 4500 banks in 24 Member States of the European Union and in Iceland, Norway, and Switzerland. The choice of banks quoting for Euribor is based on a number of market criteria, but all banks are selected to ensure that the diversity of the euro money market is adequately reflected, thereby making Euribor an efficient and representative benchmark.
Treasury Bond Contracts
Treasury bond contract is a contract based on the delivery of a U.S. Treasury bond with any coupon and at least 15 years to maturity. There are many different bonds that fit the above description. To give some type of standardization, the markets use a conversion factor to achieve a hypothetical bond with a 6% coupon. Because bond prices do not move in a linear fashion, there is a chance to use arbitrage to capitalize on the deviance of a bond when compared with the 6% standardized bond. To do this, traders look for the cheapest to deliver bond (CTD). This is the least expensive underlying product that can be delivered upon expiry to satisfy the requirements of a derivative contract. The CTD bond is always changing because prices and yields are always changing.
Problems
1.4-1.
Suppose
r
= 2.5%, and there are 36 days left to maturity of an instrument. Please calculate the appropriate discount factor if this instrument is
Treasury bond;
money market instrument;
T-bill.
1.4-2.
Please discuss the difference between Libor and Euribor.
1.4-3.
What are repos?
1.4-4.
How can you make gains short-selling assets? Please discuss.
2Forwards And Futures
2.1 Futures Fundamentals
Futures Positions: Long and Short
A futures contract is a commitment between two or more counterparties who agree to engage in a transaction at a later date and a prespecified price. The contract gives one party the right to buy/sell the underlying asset for a specific price at a specific date in the future. We call this specific price a futures price.
Depending on whether we acquire the right to buy or sell, we refer to our position as a long or a short position, respectively. The value of the contract at the outset is zero as both counterparties have the same probability of making gains at that point. No cash changes hands as a result.
Thus, the long position represents the right to buy the underlying asset at a specific futures price. The short position gives its holder the right to sell the underlying asset at a futures price sometime in the future. Futures (and forward) contracts can be written on a variety of underlying assets such as commodities, foreign exchange, short-term debt, and stock indices.
Types of Futures Contracts
Figures 2.1 and 2.2 depict long and short positions of a futures contract with a futures price of $100, respectively. The long position makes positive gains if the spot price ends up being above $100 on the delivery date, whereas the short position gains if the spot price drops below $100.
FIGURE 2.1 Long Position with Futures Price of $100
FIGURE 2.2 Short Position with Futures Price of $100
The exact payoff for each of these two positions can be calculated using the following payoff formulas.
Notation
S
T
Price of the underlying asset at maturity
F
0
Futures/forward price
At maturity time of the futures contract, the payoff is the difference between the locked-in futures price and the price of the underlying asset at that time.
At the time of the contract's maturity, there is a settlement that can be either physical or cash-settled. Settlement through actual physical delivery means that the buyer takes possession of the underlying asset. The vast majority of futures contracts, however, are settled with a single payment reflecting the market value of the derivative at the futures expiration time. An investor can offset his or her futures position by engaging in an opposite transaction before the stated maturity of the contract.
