CHAPTER 12
Introduction to Binomial Trees
Practice Questions
Problem 12.8.
Consider the situation in which stock price movements during the life of a European option
are governed by a two-step binomial tree. Explain why it is not possible to set up a posi
CHAPTER 11
Trading Strategies Involving Options
Practice Questions
Problem 11.8.
Use putcall parity to relate the initial investment for a bull spread created using calls to the
initial investment for a bull spread created using puts.
A bull spread using
CHAPTER 9
Mechanics of Options Markets
Practice Questions
Problem 9.8.
A corporate treasurer is designing a hedging program involving foreign currency options.
What are the pros and cons of using (a) the NASDAQ OMX and (b) the over-the-counter
market for
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-
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
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
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
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
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
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
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,
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
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
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
CHAPTER 1
Introduction
Practice Questions
Problem 1.8.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to
provide you with insurance against a decline in the value of your holding over the next four
months?
You should buy
CHAPTER 2
Mechanics of Futures Markets
Practice Questions
Problem 2.8.
The party with a short position in a futures contract sometimes has options as to the precise
asset that will be delivered, where delivery will take place, when delivery will take plac
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
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
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
CHAPTER 14
Employee Stock Options
Practice Questions
Problem 14.8.
Explain how you would do the analysis to produce a chart such as the one in Figure 14.2.
It would be necessary to look at returns on each stock in the sample (possibly adjusted for the
ret
CHAPTER 13
Valuing Stock Options: The Black-Scholes-Merton Model
Practice Questions
Problem 13.8.
A stock price is currently $40. Assume that the expected return from the stock is 15% and its
volatility is 25%. What is the probability distribution for the
CHAPTER 10
Properties of Stock Options
Practice Questions
Problem 10.8.
Explain why the arguments leading to putcall parity for European options cannot be used to
give a similar result for American options.
When early exercise is not possible, we can argu
Chapter 8
Securitization and the Credit Crisis of 2007
Practice Questions
Problem 8.8.
Why did mortgage lenders frequently not check on information provided by potential
borrowers on mortgage application forms during the 2000 to 2007 period?
Subprime mort
CHAPTER 7
Swaps
Practice Questions
Problem 7.8.
Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts.
At the start of the swap, both contracts have a value of approximately zero. As time passes, it
is likely that
CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.8.
The price of a 90-day Treasury bill is quoted as 10.00. What continuously compounded
return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day
period?
The cash
CHAPTER 5
Determination of Forward and Futures Prices
Practice Questions
Problem 5.8.
Is the futures price of a stock index greater than or less than the expected future value of the
index? Explain your answer.
The futures price of a stock index is always