Chapter 1
Introduction
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
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, forwa
Chapter 24
Credit Derivatives
Options, Futures, and Other Derivatives 8th Ediition,
Copyright John C. Hull 2012
1
Credit Default Swaps
Buyer of the instrument acquires protection from the seller
against a default by a particular company or country (the
re
Chapter 22
Estimating Volatilities and
Correlations
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
Standard Approach to Estimating Volatility (page
498)
Define n as the volatility per day between day
n-1 and day n, as
Chapter 32
Swaps Revisited
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
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 v
Chapter 31
Interest Rate Derivatives:
HJM and LMM
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
HJM Model: Notation
P(t,T): priceattimetofadiscountbond
withprincipalof$1maturingatT
t: vectorofpastandpresentvaluesof
i
Chapter 29
Quanto, Timing, and
Convexity Adjustments
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
Forward Yields and
Forward Prices
We define the forward yield on a bond as the yield
calculated from the forward bond
Chapter 30
Interest Rate Derivatives:
Model of the Short Rate
Options, Futures, and Other Derivatives, 8th
Edition, Copyright John C. Hull 2012
1
Term Structure Models
Blacks model is concerned with describing
the probability distribution of a single
vari
Chapter 28
Interest Rate Derivatives:
The Standard Market
Models
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
The Complications in Valuing
Interest Rate Derivatives (page 648)
We need a whole term structure to define
Chapter 35
Derivatives Mishaps and What
We Can Learn From Them
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
Big Losses by Financial Institutions
Allied Irish Bank ($700 million)
Amaranth ($6 billion)
Barings ($1 bill
Chapter 34
Real Options
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
An Alternative to the NPV Rule for
Capital Investments
Define stochastic processes for the key
underlying variables and use risk-neutral
valuation
Chapter 26
More on Models and
Numerical Procedures
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
Three Alternatives to Geometric
Brownian Motion
Constant elasticity of variance (CEV)
Mixed Jump diffusion
Variance Gamm
Chapter 20
Basic Numerical Procedures
Options, Futures, and Other Derivatives, 8 th Edition,
Copyright John C. Hull 2012
1
Approaches to Derivatives
Valuation
Trees
Monte Carlo simulation
Finite difference methods
Options, Futures, and Other Derivatives,
Chapter 3
Hedging Strategies Using
Futures
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
Long & Short Hedges
A long futures hedge is appropriate when
you know you will purchase an asset in
the future and want to lock
Chapter 4
Interest Rates
Options, Futures, and Other Derivatives 8th Edition,
Copyright John C. Hull 2012
1
Types of Rates
Treasury rates
LIBOR rates
Repo rates
Options, Futures, and Other Derivatives 8th Edition,
Copyright John C. Hull 2012
2
Treasury Ra
Chapter 2
Mechanics of Futures
Markets
Options, Futures, and Other Derivatives, 8th Edition, Copyright
John C. Hull 2012
1
Futures Contracts
Available on a wide range of assets
Exchange traded
Specifications need to be defined:
What can be delivered,
Whe
Chapter 9
Mechanics of Options
Markets
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
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 i
Chapter 13
Wiener Processes and Its
Lemma
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
Stochastic Processes
Describes the way in which a variable such
as a stock price, exchange rate or interest
rate changes through
Chapter 8
Securitization and the Credit
Crisis of 2007
Options, Futures, and Other Derivatives 8th Edition,
Copyright John C. Hull 2012
1
Securitization
Traditionally banks have funded loans with
deposits
Securitization is a way that loans can
increase mu
Chapter 14
The Black-Scholes-Merton
Model
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
The Stock Price Assumption
Consider a stock whose price is S
In a short period of time of length t, the
return on the stock is no
Chapter 15
Employee Stock Options
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
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-money
Chapter 18
The Greek Letters
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
Example
A bank has sold for $300,000 a European call
option on 100,000 shares of a non-dividend
paying stock
S0 = 49, K = 50, r = 5%, = 20%,
T
Chapter 19
Volatility Smiles
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
What is a Volatility Smile?
It is the relationship between implied volatility
and strike price for options with a certain
maturity
The volatil
Chapter 6
Interest Rate Futures
Options, Futures, and Other Derivatives, 8th Edition,
Copyright John C. Hull 2012
1
Day Count Convention
Defines:
the period of time to which the interest rate applies
The period of time used to calculate accrued
interest (