Futures and Options (GB.3335.01)
Fall 2012
Professor Menachem Brenner
Course Description: This is a course in derivatives markets: structure, valuation and strategies.
The main applications include the equities markets, foreign exchange and commodities.
I
Financial Calculator Tutorial
Foundations of Finance
Professor Itamar Drechsler
Outline
Getting started
A simple cash flow
Multiple cash flows
Annuity
NPV
IRR
Getting started
Three major types of financial
calculators for this class:
HP 12C
Small
Topic 7: Equity Valuation
Professor Itamar Drechsler
1
Outline
1. Balance sheet valuation concepts
2. Fundamental value aka intrinsic value
Dividend Discount Model (DDM)
Zero dividend growth
Constant dividend growth
!= Gordon Growth Model
!Valuation rat
Topic 9: Options
Professor Itamar Drechsler
1
Review of Option Strategies
1.Calls for leverage
2.Protective put = stock + put
3.Covered call = stock + short call
4.Straddle (Strangle) = ATM (OTM) put + call
5.Collar = stock + put + short call
6.Bull sprea
Black and Scholes formula
Initial stock price
Strike price
Risk-free rate (annual)
Expiration (years)
Dividend rate (annual)
Stock price volatility (annual)
S0
X
r
T
delta
sigma
Option Price
d1
d2
C
a
b
c
a-b+c
d
a-b+c+d
Components
intrinsic value
PV of d
Maturity Portfolio weight PV of bonds Bond price
No. of bonds Year 15 FV
Bond price PV of bonds Year 15 FV
with y=
with y=
(millions)
with y=
with y=
with y=
with y=
0.06
0.06
0.06
0.07
0.07
0.07
LIABILITIES
15
41.7265061 41.726506074
1
100 36.244602 36.2
Y ie ld T o M a t u r it y
US YIELD CURVE DYNAMICS
Static Features:
Sigma=
T=
Inputs
Row
2
20%
0.00
Dynamic Chart
Shape = Upward
X=
r=
0
Month =
Apr-04
Graph Inputs
0%
Dynamic Chart of US Yield Curve Dynamics
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
Concept Questions 11
Prof. Itamar Drechsler
1. What does the prot or loss look like on settlement date of a futures contract
for the person who sells the contract?
(a) It looks like a long put position
(b) It looks like a short put position
(c) It looks l
Topic 8d: Interest Rate Management
Professor Itamar Drechsler
1
Outline
! Interest rate sensitivity of a bond price
! Duration
! Convexity
! Duration matching: immunization
2
Interest-Rate Sensitivity
! First order effect: Bond prices and interest
rates a