Lecture 1 (Ch 1&2): Introduction & Futures Market Mechanics
What is a Derivative?
A derivative is defined as a financial instrument whose value depends on the values of other, more basic underlying variables. Very often the variables underlying derivative
FINS3635 S1/2012
Example for Hedging with Futures
Matthias Thul
Last Update: March 18, 2012
This problem guides you through the main points that have to be considered when hedging
with futures contracts. The necessary information is introduced step by ste
FINS3635 S1/2012
Replication vs. Hedging
Matthias Thul
Last Update: March 31, 2012
The document Replication of Forward Contracts discusses how we can price forward
contract by replicating their terminal payos and then employing a no-arbitrage argument to
FINS3635 S1/2012
Replication of Forward Contracts
Matthias Thul
Last Update: March 16, 2012
This summary guides you through the replication and pricing of forward contracts for underlyings with various types of holding returns. Based on an analysis of the
FINS3635 S1/2012
Valuation of old Forwards
Matthias Thul
Last Update: March 27, 2012
Valuation of old Forward Contracts
When entering into a fair priced forward contract, the delivery price K is chosen such that the
value is zero and there are no initial
FINS3635 S1/2012
How does Short-Selling work?
Matthias Thul
Last Update: March 16, 2012
This document discusses how short-selling a works and which transactions it involves. Since
this material has not been explicitly discussed in class, it is by itself o
FINS3635 S1/2012
Example for Pricing of Forwards
Matthias Thul
Last Update: March 28, 2012
This document guides you through the most common problems related to the pricing of
forward contracts. The example is based on a stock index with a dividend yield o
FINS3635 S1/2012
Pricing of unusual Forward Contracts
Matthias Thul
Last Update: April 1, 2012
This documents shows you how the idea of pricing via replication and no-arbitrage can be
easily applied to other unusual forward contracts. See the document Rep
FINS3635 S1/2012
Margining for Futures Contracts
Matthias Thul
Last Update: March 5, 2012
This document guides you through the margining mechanism that is used for exchange
traded derivative contracts such as futures and listed options. The main motivatio
FINS3635 S1/2012
Why do Forward and Futures Prices usually dier?
Matthias Thul
Last Update: March 10, 2012
In your rst lecture notes, you nd the statement If the interest rate is deterministic
the forward price and futures price are equal. This document s
Lecture 12: (Ch17) The Greeks
Management of Market Risk o o o Delta Gamma Vega
Other Greek Letters o o Theta Rho
Example (Hull 17.1)
A bank has sold (for $300,000) a European call option on 100,000 shares of a nondividend paying stock S0 = 49, X = 50, r
L ectu re 11: (Ch15&16) O ptions on Other Assets
Index options o Extension of results for European options on non-dividend-paying s tock to European options on a stock paying a known dividend yield o Portfolio insurance
Currency options Futures options
I
Lecture 10: (Ch12 & 13) Stochastic Processes & BS Model
Discrete-time stochastic process is one where the value of the variable can change only at certain fixed points in time, whereas a continuous-time stochastic process is one where changes can take pl
L ectu re 9: (Ch11) Binomial M odels
The binomial t ree is a diagram representing different possible paths that might be followed by the stock price over the life of the option. The u nderlying assumption is t hat the stock price follows a random walk. Ch
L ectu re 8: (Ch10) Option S trategies
The alternative: Take a single option position or combine it with the underlying Take positions in 2 or more options of the same type (a spread) Take positions in a mixture of calls & puts (a combination)
Single Opti
Lecture 7: (Ch9&10) Options Properties & Market Mechanics
Payoff and Profits
Call
Stock Price = S Exercise Price = X Payoff to Call Buyer = (S - X) if S >X, 0 if S <X Profit to Call Buyer = Payoff option price Payoff to Call Writer = -(S - X) if S >X, 0
L ectu re 3-4: (Ch3) Hedging W ith F u tu res
Basic P r inciples
A perfect hedge is one that completely eliminates r isk A short hedge i s a hedge that involves a short position in futures contracts used when an investor already owns an asset and expects
Rc = m ln (1 + ) Where Rc = rate of interest continuously compounding And Rm = Equivalent rate with compounding m times per annum.
Lecture 2 (Ch5):
Pricing Forwards & Futures
Investment Assets vs. Consumption Assets
When considering forward and futures co
Lecture 5: (Ch7) Swaps
Basic Principles
A swap is an agreement to exchange cash flows at specified future times according to certain specified rules. A forward contract can be viewed as an example of a swap Whereas a forward contract is equivalent to the