SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 19
The Greek Letters
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
Example
A bank has sold for $300,000 a European call
option on 100,000 shares of a nondividend
paying stock
S0 = 49, K = 50, r = 5%, = 20%,
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 30
Convexity, Timing, and
Timing, and Quanto
Adjustments
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
Forward Yields and
Forward Prices
We define the forward yield on a bond as the yield
calculated from the
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 5
Determination of Forward and
Futures Prices
Options, Futures, and Other Derivatives, 10th Edition,
John C. Hull 2017
Copyright
1
Consumption vs Investment Assets
Investment assets are assets held by
significant numbers of people purely for
inve
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Topic Gateway Series
Activity Based Costing
Overview
The concept of ABC was first defined in the late 1980s by Robert Kaplan and
William Burns. Initially ABC focused on manufacturing industry where
technological developments and productivity improvements
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 2
Futures Markets and
Central Counterparties
Options, Futures, and Other Derivatives, 10th Edition, Copyright
John C. Hull 2017
1
Futures Contracts
Available on a wide range of assets
Exchange traded
Specifications need to be defined:
What can be
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Topic Gateway Series
Balanced Scorecard
Definition and concept
An approach to the provision of information to the management to assist with
strategic policy formulation and achievement. It emphasises the need to provide
the user with a set of information
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 17
Options on Stock Indices
and Currencies
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
Index Options (page 365367)
The most popular underlying indices in the U.S. are
The S&P 100 Index (OEX and XEO)
The S&
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 36
Real Options
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
An Alternative to the NPV Rule for
Capital Investments
Define stochastic processes for the key
underlying variables and use riskneutral
valuation
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 6
Interest Rate Futures
Options, Futures, and Other Derivatives, 10th Edition,
John C. Hull 2017
Copyright
1
Day Count Convention
Defines:
the period of time to which the interest rate applies
The period of time used to calculate accrued
interest
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 1
Introduction
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
What is a Derivative?
A derivative is an instrument whose value
depends on, or is derived from, the value of
another asset.
Examples: futures, forw
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
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Fall 2016
Chapter 3
Hedging Strategies Using
Futures
Options, Futures, and Other Derivatives, 10th Edition,
John C. Hull 2017
Copyright
1
Long & Short Hedges
A long futures hedge is appropriate when
you know you will purchase an asset in
the future and want to loc
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 21
Basic Numerical Procedures
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
Approaches to Derivatives Valuation
Trees
Monte Carlo simulation
Finite difference methods
Options, Futures, and Other Derivatives,
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 10
Mechanics of Options
Markets
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
Review of Option Types
A call is an option to buy
A put is an option to sell
A European option can be exercised only at
the end of
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 33
HJM, LMM, and Multiple
Zero Curves
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
HJM Model: Notation
P(t,T ): price at time t of a discount
bond with principal of $1
maturing at T
t : vector of past and pr
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 22
Value at Risk and Expected
Shortfall
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
The Question Being Asked in VaR
What loss level is such that we are X%
confident it will not be exceeded in N
business day
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 15
The BlackScholesMerton
Model
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
S
2
t,
The Stock Price Assumption
Consider a stock whose price is S
In a short period of time of length t, the
return on the sto
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 28
Martingales and Measures
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
Derivatives Dependent on a Single
Underlying Variable
Consider a variable (not necessaril y the price
of a traded security) that follo
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
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Fall 2016
Chapter 23
Estimating Volatilities and
Correlations
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
m
1
2
2
(
u
u
)
n
uim1ni1ni
m
Standard Approach to Estimating Volatility (page
520)
Define n as the volatility per day
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 13
Binomial Trees
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
A Simple Binomial Model
A stock price is currently $20
In 3 months it will be either $22 or $18
Stock Price = $22
Stock price = $20
Stock Price
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 27
More on Models and
Numerical Procedures
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
Three Alternatives to Geometric Brownian Motion
Constant elasticity of variance (CEV)
Mixed Jump diffusion
Variance Gam
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 9
XVAs
Options, Futures, and Other Derivatives 10th Edition,
Copyright John C. Hull 2017
1
CVA
Credit valuation adjustment (CVA) is an
adjustment to the nodefault value of
derivatives arising from the possibility of a
counterparty default
Options
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 18
Futures Options and Blacks
Model
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
Options on Futures
Referred to by the maturity month of the
underlying futures
The option is American and usually expires
on o
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 37
Derivatives Mishaps and What
We Can Learn From Them
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
Big Losses by Financial Institutions
Allied Irish Bank ($700 million)
Amaranth ($6 billion)
Barings ($1 bil
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 8
Securitization and the Credit
Crisis of 2007
Options, Futures, and Other Derivatives 10th Edition,
Copyright John C. Hull 2017
1
Securitization
Traditionally banks have funded loans with
deposits
Securitization is a way that loans can
increase m
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Topic Gateway Series
Budgeting
Budgeting
Definition and concept
A budget is:
'A quantitative expression of a plan for a defined period of time. It may include
planned sales volumes and revenues, resource quantities, costs and expenses,
assets, liabilities
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 12
Trading Strategies Involving
Options
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
Strategies to be Considered
Bond plus option to create principal
protected note
Stock plus option
Two or more options of t
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 11
Properties of Stock Options
Options, Futures, and Other Derivatives, 10th Edition, Copyright John C. Hull 2017
1
Notation
c:
European call
option price
C:
American call
option price
p:
European put
option price
P:
American put
option price
S0:
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 16
Employee Stock Options
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
Nature of Employee Stock Options
Employee stock options are call options
issued by a company on its own stock
They are often atthemone
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 29
Interest Rate Derivatives:
The Standard Market
Models
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
The Complications in Valuing
Interest Rate Derivatives (page 670)
We need a whole term structure to defin
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
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Fall 2016
Chapter 7
Swaps
Options, Futures, and Other Derivatives, 10th Edition, Copyright
John C. Hull 2017
1
Nature of Swaps
A swap is an agreement to exchange
cash flows at specified future times
according to certain specified rules
Options, Futures, and Other
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Chapter 34
Swaps Revisited
Options, Futures, and Other Derivatives, 10th Edition,
Copyright John C. Hull 2017
1
Valuation of Swaps
The standard approach is to assume that
forward rates will be realized
This works for plain vanilla interest rate and
plain
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
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Fall 2016
Chapter 26
Exotic Options
Options, Futures, and Other Derivatives, 10th
Edition, Copyright John C. Hull 2017
1
Types of Exotics
Packages
Perpetual American calls
and puts
Nonstandard American
options
Gap options
Forward start options
Cliquet options
Compo
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
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Fall 2016
Chapter 25
Credit Derivatives
Options, Futures, and Other Derivatives 10th
Ediition, Copyright John C. Hull 2017
1
Credit Default Swaps
Buyer of the instrument acquires protection from the seller
against a default by a particular company or country (the
r
SKANS School of Accountancy (Abubakar Block Campus)
Financial Analyst
FINANCIAL 124

Fall 2016
Topic Gateway Series
Planning and Forecasting
Planning and Forecasting
Definition and concept
Planning is defined as:
'The establishment of objectives, and the formulation, evaluation and selection of
the policies, strategies, tactics and action required