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CH3: (Hedging
and Hedging Strategies)
Hedge/Hedging:
Hedging
Outline
Why to Hedge?
How to Hedge - Hedging Strategies
- ?
Hedging Effectiveness
What Can Go Wrong with Hedging
Hedging Disasters
Hedging and Hedging Strategies
Hedging and Hedging Str

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Lecture 1: Introduction to Derivatives
Derivatives is an instrument whose value depends on the values
of other more basic underlying variables. Unlike shares, which
are issued by companies and purchased by investors.
Derivatives represents an agreemen

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6
A call option is an agreement that gives
the holder the right to buy an asset by a certain date
for a certain price
A put option is an agreement that gives
the holder the right to sell
The date specified in the contract is the
expiration date (m

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? Treasury rate: the interest rate
applicable to borrowing by a government in its
own currency
? LIBOR rate: London
Interbank Offer Rate the rate that one bank is
willing to lend money to another bank
? Repo rate: the interest rate implied
in a repo a

Strategies involving
options and the underlying: Take a position in
the option and the underlying
Option spreads: Take a
position in 2 or more options of the same type
Call and put combinations: Take
a position in a mixture of calls & puts
7:
Options

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Futures Contracts
Lecture 2: Determination of Futures Prices
(
Outline
Operation of margins
Futures pricing
Futures price and (expected) spot price
Available on a wide range of underlying assets
Exchange traded
Specifications need to be defined

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The impact of B-S-M model is apparent from the following excerpt from
the Nobel prize citation: B-S-M
How good is the B-S model in pricing
options? B-S
This year's laureates, Robert Merton and Myron Scholes, developed this
method in close collaborati

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Binomial Model
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Lecture 7: Binomial Model
Outline
Riskless Portfolio
Binomial Model
Risk Neutral Valuation
Binomial
Approximation
Outline
A method of option pricing in which
the time to maturity is divided into many
Riskless Portfolio
short interv

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Lecture 10 Risk Parameters
The Greek Letters
Consider the following two scenarios
:
Outline
Greek Letters
Delta () A Measure of Direction
Theta () A Measure of Time Decay
Gamma () A Measure of Delta Hedging ErrorsDelta
Vega () Monitoring the Co

B-S
Ch12: B-S
The stock pays no dividends during the option's life
European exercise terms are used
Markets are efficient
No commissions are charged
Interest rates remain constant and known
Stock prices are lognormally distributed
Outline
Eu