Introduction
Chapter 1
Fundamentals of Futures and Options Markets, 7th Ed, Ch 1, Copyright John C. Hull 2010
1
The Nature of Derivatives
A derivative is an instrument whose value
depends on the values of other more
basic underlying variables
Fundamentals
Exotic Options and Other
Nonstandard Products
Chapter 22
Fundamentals of Futures and Options Markets, 7th Ed, Ch 22, Copyright John C. Hull 2010
1
Types of Exotic Options
Packages
Nonstandard
American options
Gap
options
Forward start options
Compoun
Credit Derivatives
Chapter 23
Fundamentals of Futures and Options Markets, 7th Ed, Ch 23, Copyright John C. Hull 2010
1
Credit Derivatives
Derivatives
where the payoff depends on
the credit quality of a company or
sovereign entity
The market started to
Weather, Energy, and
Insurance Derivatives
Chapter 24
Fundamentals of Futures and Options Markets, 7th Ed, Ch 24, Copyright John C. Hull
2010
1
Weather Derivatives: Definitions
Heating
degree days (HDD): For each day
this is max(0, 65 A) where A is the
a
Derivatives Mishaps and
What We Can Learn from
Them
Chapter 25
Fundamentals of Futures and Options Markets, 7th Ed, Ch 25, Copyright John C. Hull 2010
1
Big Losses by Financial
Institutions
Allied Irish Bank ($700 million)
Amaranth (6 billion)
Barings ($1
Volatility Smiles
Chapter 19
Fundamentals of Futures and Options Markets, 7th Ed, Ch 19, Copyright John C. Hull 2010
1
Volatility Smile
A
volatility smile shows the variation of
the implied volatility with the strike price
The volatility smile is the sam
Binomial Trees in
Practice
Chapter 18
Fundamentals of Futures and Options Markets, 7th Ed, Ch 18, Copyright John C. Hull 2010
1
Binomial Trees
Binomial trees are frequently used to
approximate the movements in the price of
a stock or other asset
In each
Mechanics of Futures
Markets
Chapter 2
Fundamentals of Futures and Options Markets, 7th Ed, Ch 2, Copyright John C. Hull 2010
1
Futures Contracts
Available
on a wide range of underlyings
Exchange traded
Specifications need to be defined:
What can be de
Hedging Strategies Using
Futures
Chapter 3
Fundamentals of Futures and Options Markets, 7th Ed, Ch3, Copyright John C. Hull 2010
1
Long & Short Hedges
A
long futures hedge is appropriate when
you know you will purchase an asset in
the future and want to l
Interest Rates
Chapter 4
Fundamentals of Futures and Options Markets, 7th Ed, Ch 4, Copyright John C. Hull 2010
1
Types of Rates
Treasury
rates LIBOR rates Repo rates
Fundamentals of Futures and Options Markets, 7th Ed, Ch 4, Copyright John C. Hull 2010
Determination of Forward
and Futures Prices
Chapter 5
Fundamentals of Futures and Options Markets, 7th Ed, Ch 5, Copyright John C. Hull 2010
1
Consumption vs Investment Assets
Investment
assets are assets held by
significant numbers of people purely for
Interest Rate Futures
Chapter 6
Fundamentals of Futures and Options Markets, 7th Ed, Ch 6, Copyright John C. Hull 2010
1
Day Count Conventions
in the U.S. (Page 131-132)
Treasury Bonds: Actual/Actual (in period)
Corporate Bonds: 30/360
Money Market Instru
Securitization and the
Credit Crisis of 2007
Chapter 8
Fundamentals of Futures and Options Markets 7th Ed, Ch 8, Copyright John C. Hull 2010
1
Asset Backed Security (Simplified)
Senior Tranche
Principal: $80 million
Return = LIBOR + 60bp
Asset 1
Asset 2
A
Mechanics of Options
Markets
Chapter 9
Fundamentals of Futures and Options Markets, 7th Ed, Ch 9, Copyright John C. Hull 2010
1
Types of Options
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
Trading Strategies
Involving Options
Chapter 11
Fundamentals of Futures and Options Markets, 7th Ed, Ch 11, Copyright John C. Hull 2010
1
Three Alternative Strategies
Take
a position in the option and
the underlying
Take a position in 2 or more
options
Valuing Stock Options:
The Black-Scholes-Merton
Model
Chapter 13
Fundamentals of Futures and Options Markets, 7th Ed, Ch 13, Copyright John C. Hull 2010
1
The Black-Scholes-Merton
Random Walk Assumption
Consider
a stock whose price is S
In a short perio
Employee Stock Options
Chapter 14
Fundamentals of Futiures and Options Markets, 7th Ed, Ch 14, Copyright John C. Hull
2010
1
Nature of Employee Stock Options
Employee
stock options are call
options issued by a company on its
own stock
They are often at-
The Greek Letters
Chapter 17
Fundamentals of Futures and Options Markets, 7th Ed, Ch 17, Copyright John C. Hull 2010
1
Example (Page 359)
A bank has sold for $300,000 a European call
option on 100,000 shares of a non-dividendpaying stock
S = 49, K = 50,