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Full Description
A step-by-step approach to the mathematical financial theory and quantitative methods needed to implement and apply state-of-the-art valuation techniques
Written as an accessible and appealing introduction to financial derivatives, Elementary Financial Derivatives: A Guide to Trading and Valuation with Applications provides the necessary techniques for teaching and learning complex valuation techniques. Filling the current gap in financial engineering literature, the book emphasizes an easy-to-understand approach to the methods and applications of complex concepts without focusing on the underlying statistical and mathematical theories.
Organized into three comprehensive sections, the book discusses the essential topics of the derivatives market with sections on options, swaps, and financial engineering concepts applied primarily, but not exclusively, to the futures market. Providing a better understanding of how to assess risk exposure, the book also includes:
A wide range of real-world applications and examples detailing the theoretical concepts discussed throughout
Numerous homework problems, highlighted equations, and Microsoft® Office Excel® modules for valuation
Pedagogical elements such as solved case studies, select answers to problems, and key terms and concepts to aid comprehension of the presented material
A companion website that contains an Instructor's Solutions Manual, sample lecture PowerPoint® slides, and related Excel files and data sets
Elementary Financial Derivatives: A Guide to Trading and Valuation with Applications is an excellent introductory textbook for upper-undergraduate courses in financial derivatives, quantitative finance, mathematical finance, and financial engineering. The book is also a valuable resource for practitioners in quantitative finance, industry professionals who lack technical knowledge of pricing options, and readers preparing for the CFA exam.
Jana Sacks, PhD, is Associate Professor in the Department of Accounting and Finance at St. John Fisher College in Rochester, New York. A member of The American Finance Association, the National Association of Corporate Directors, and the International Atlantic Economic Society, Dr. Sack's research interests include risk management, credit derivatives, pricing, hedging, and structured finance.
Contents
Preface xi
Acknowledgments xiii
Table of Figures xv
About the Companion Websites xix
1 DERIVATIVE INSTRUMENTS: CONCEPTS AND DEFINITIONS 1
1.1 Key Derivative Instruments Definitions, 1
1.2 The Role, Risks, and Benefits of Derivatives Markets, 2
1.3 Arbitrage, 4
Case Study 1.3-1, 4
Problems, 5
1.4 Miscellaneous, 5
Problems, 7
2 FORWARDS AND FUTURES 9
2.1 Futures Fundamentals, 9
2.1.1 Futures Margin Account and Marking to Market, 17
Case Study 2.1.1-1, 19
Problems, 21
2.1.2 Futures Hedging, 21
Case Study 2.1.2-1, 23
Problems, 26
2.2 Forward Rate Agreements, 27
Case Study 2.2-1, 27
Case Study 2.2-2, 29
Case Study 2.2-3, 34
Case Study 2.2-4, 37
Problems, 38
2.3 Currency Forwards, 40
Case Study 2.3-1, 41
Case Study 2.3-2, 47
Problems, 53
3 SWAPS 55
3.1 Swaps Fundamentals, 55
3.1.1 Interest Rate Swap, 57
Case Study 3.1.1-1, 58
Case study 3.1.1-2, 65
Case Study 3.1.1-3, 68
Problems, 69
3.2 Equity, Currency, and FX Swaps, 69
3.2.1 Equity Swaps, 69
Case Study 3.2.1-1, 72
Case Study 3.2.1-2, 74
Case Study 3.2.1-3, 75
Case Study 3.2.1-4, 77
Case Study 3.2.1-5, 77
Problems, 78
3.2.2 Currency/FX Swap, 80
Case Study 3.2.2-1, 83
Case Study 3.2.2-2, 86
Problems, 89
3.3 Other Yield Curve-Dependent Swaps, 89
3.3.1 Basic Swap, 89
Case Study 3.3.1-1, 91
Case Study 3.3.1-2, 93
Problems, 95
3.3.2 Credit Default Swap, 96
Case Study 3.3.2-1, 105
Problems, 106
4 OPTIONS 107
4.1 Options Fundamentals, 107
4.1.1 Basic Information, 107
4.1.2 Options Trading Strategies, 115
Case Study 4.1.2-1, 121
Case Study 4.1.2-2, 123
Problems, 124
4.2 Pricing, 126
4.2.1 Binomial Tree Option Pricing Model, 126
Case Study 4.2.1-1, 131
Case Study 4.2.1-2, 134
Problems, 135
Case Study 4.2.1-3, 141
Case Study 4.2.1-4, 145
Case Study 4.2.1-5, 149
Problems, 151
4.2.2 Black-Scholes Formula, 153
Case Study 4.2.2-1, 156
Case Study 4.2.2-2, 159
Case Study 4.2.2-3, 160
Case Study 4.2.2-4, 164
Problems, 165
4.3 Greeks, 166
4.3.1 Delta, 166
Case Study 4.3-1, 168
Case Study 4.3-2, 169
4.3.2 Gamma, 170
4.3.3 Rho, 171
Case Study 4.3-3, 172
4.3.4 Vega, 173
Case Study 4.3-4, 174
4.3.5 Theta, 175
Case Study 4.3-5, 176
Problems, 177
4.4 Volatility, 178
4.4.1 Delta Hedging, 178
Case Study 4.4.1-1, 180
4.4.2 Greek Neutrality, 182
Case Study 4.4.2-1, 182
Case Study 4.4.2-2, 184
Case Study 4.4.2-3, 186
4.4.3 Implied Volatility, 187
Case Study 4.4.3-1, 187
Problems, 188
4.5 Exotics, 189
4.5.1 Asian Options, 189
4.5.2 Barrier Option, 189
4.5.3 Basket Options, 190
4.5.4 Binary Options, 190
4.5.5 Chooser Options, 191
4.5.6 Forward Start Options, 192
4.5.7 Look-back Options, 192
Problems, 192
Literature 195
Index 199
