Derivatives - Theory and Practice

Three experts provide an authoritative guide to the theory and practice of derivatives
 
Derivatives: Theory and Practice and its companion website explore the practical uses of derivatives and offer a guide to the key results on pricing, hedging and speculation using derivative securities. The book links the theoretical and practical aspects of derivatives in one volume whilst keeping mathematics and statistics to a minimum. Throughout the book, the authors put the focus on explanations and applications.
 
Designed as an engaging resource, the book contains commentaries that make serious points in a lighthearted manner. The authors examine the real world of derivatives finance and include discussions on a wide range of topics such as the use of derivatives by hedge funds and the application of strip and stack hedges by corporates, while providing an analysis of how risky the stock market can be for long-term investors, and more.
 
To enhance learning, each chapter contains learning objectives, worked examples, details of relevant finance blogs technical appendices and exercises.

List of contents

About the Authors xxvii
 
About the Companion Site xxix
 
Preface xxxi
 
Chapter 1 Derivative Securities 1
 
1.1 Forwards and Futures 2
 
1.2 Options 7
 
1.3 Swaps 14
 
1.4 Hedging, Speculation, and Arbitrage 16
 
1.5 Short-Selling 18
 
1.6 Summary 20
 
Exercises 21
 
Part I Forwards and Futures 23
 
Chapter 2 Futures Markets 25
 
2.1 Trading on Futures Markets 25
 
2.2 Futures Exchanges and Traders 29
 
2.3 Margins and Marking-to-Market 30
 
2.4 Summary 36
 
Exercises 36
 
Chapter 3 Forward and Futures Prices 39
 
3.1 Pricing Forward Contracts 39
 
3.2 Dividends, Storage Costs, and Convenience Yield 46
 
3.3 Commodity Futures 49
 
3.4 Value of a Forward Contract 53
 
3.5 Summary 57
 
Exercises 57
 
Chapter 4 Futures: Hedging and Speculation 59
 
4.1 Hedging Using Futures 59
 
4.2 Novel Futures Contracts 67
 
4.3 Speculation 70
 
4.4 Summary 72
 
Exercises 73
 
Chapter 5 Index Futures 75
 
5.1 Stock Index Futures (SIF) 76
 
5.2 Index Arbitrage 78
 
5.3 Hedging 81
 
5.4 Tailing the Hedge 88
 
5.5 Summary 89
 
Appendix 5: Hedge Ratios 89
 
Exercises 93
 
Chapter 6 Strategies: Stock Index Futures 95
 
6.1 Underpriced Stocks: Hedging Market Risk 95
 
6.2 Overpriced Stocks: Hedging Market Risk 98
 
6.3 Market-neutral Hedge Fund 100
 
6.4 Long-Short Hedge Fund 101
 
6.5 Changing Stock Market Exposure 104
 
6.6 Merger Arbitrage 106
 
6.7 Summary 109
 
Appendix 6.A: Stock Picking and Market Risk 110
 
Appendix 6.B: Market Timing 112
 
Appendix 6.C: Hedging: Long-Short Portfolio 114
 
Appendix 6.D: Merger Arbitrage and Hedging 116
 
Exercises 117
 
Chapter 7 Currency Forwards and Futures 119
 
7.1 FX-Futures Contracts 120
 
7.2 Pricing FX-Forward Contracts 123
 
7.3 Pricing FX-Futures Contracts 126
 
7.4 Hedging and Speculation: Forwards 127
 
7.5 Hedging and Speculation: Futures 129
 
7.6 Summary 132
 
Appendix 7: Hedging Using FX-Futures 133
 
Exercises 135
 
Part II Fixed Income: Cash Markets 137
 
Chapter 8 Interest Rates 139
 
8.1 LIBOR, Repos, Fed Funds, and OIS Rates 139
 
8.2 Day-Count Conventions 141
 
8.3 Forward Rates 146
 
8.4 Forward Rate Agreements (FRAs) 150
 
8.5 Summary 154
 
Exercises 154
 
Chapter 9 Bond Markets 157
 
9.1 Prices, Yields, and Return 158
 
9.2 Pricing Coupon Bonds 165
 
9.3 Summary 168
 
Exercises 169
 
Chapter 10 Bonds: Duration and Convexity 171
 
10.1 Yield Curve 171
 
10.2 Duration and Convexity 173
 
10.3 Summary 178
 
Appendix 10: Duration and Convexity 179
 
Exercises 181
 
Part III Fixed Income Futures Contracts 183
 
Chapter 11 Interest Rate Futures 185
 
11.1 Three-month Eurodollar Futures Contract 186
 
11.2 Sterling 3-month Futures Contract 188
 
11.3 T-bill Futures 188
 
11.4 Futures Price and Forward Rates 189
 
11.5 Pricing Interest Rate Futures 190
 
11.6 Arbitrage: Implied Repo Rate 193
 
11.7 Speculation 195
 
11.8 Spread Trades 196
 
11.9 Summary 199
 
Appendix 11.A: Futures Prices and Interest Rates 200
 
Exercises 203
 
Chapter 12 Hedging with Interest Rate Futures 205
 

About the author

KEITH CUTHBERTSON is professor of Finance at CASS Business School, City, University of London. He has worked at H.M.Treasury, Bank of England, National Institute of Economic and Social Research NIESR and at business schools at Imperial College London and the University of Newcastle.

DIRK NITZSCHE is Senior Lecturer in Finance, Course Director for the Quants Masters Programmes, and Associate Dean for International Relations at CASS Business School, City, University of London.

NIALL O' SULLIVAN is professor of economics at Cork University Business School, University College Cork and former adjunct lecturer at Dublin City University Business School.

Summary

Three experts provide an authoritative guide to the theory and practice of derivatives

Derivatives: Theory and Practice and its companion website explore the practical uses of derivatives and offer a guide to the key results on pricing, hedging and speculation using derivative securities. The book links the theoretical and practical aspects of derivatives in one volume whilst keeping mathematics and statistics to a minimum. Throughout the book, the authors put the focus on explanations and applications.

Designed as an engaging resource, the book contains commentaries that make serious points in a lighthearted manner. The authors examine the real world of derivatives finance and include discussions on a wide range of topics such as the use of derivatives by hedge funds and the application of strip and stack hedges by corporates, while providing an analysis of how risky the stock market can be for long-term investors, and more.

To enhance learning, each chapter contains learning objectives, worked examples, details of relevant finance blogs technical appendices and exercises.

Product details

• Authors: K Cuthbertson, Keit Cuthbertson, Keith Cuthbertson, Keith (Newcastle Upon Tyne University Cuthbertson, Keith Nitzsche Cuthbertson, Cuthbertson Keith, Dir Nitzsche, Dirk Nitzsche, Nitzsche Dirk, Nial O'Sullivan, Niall O'Sullivan, O'Sullivan Niall
• Publisher: Wiley, John and Sons Ltd
• Languages: English
• Product format: Paperback / Softback
• Released: 30.09.2019
• EAN: 9781119595595
• ISBN: 978-1-119-59559-5
• No. of pages: 912
• Subjects: Social sciences, law, business > Business > Business administration; Financial Engineering, Finance & Investments, Finanz- u. Anlagewesen, Finanztechnik, Derivat (Wertpapier)