Derivative Instruments (eBook)

Cover 1
TOC$Contents 8
Foreword 12
Preface 13
About the Authors 14
CH$Chapter 1. Introduction to Derivatives 16
1.1 Exchange-based futures contracts 19
1.2 Forward contracts 19
1.3 Options 21
1.4 Swaps 21
1.5 The future? 24
CH$Chapter 2. Overview of Fixed Income Securities 29
2.1 Basic concepts 29
2.2 Bond price in continuous time 34
2.3 Forward rates 38
Appendix 2.1 The integral 41
Appendix 2.2 The derivation of the bond price equation in continuous time 43
CH$Chapter 3. Forwards and Futures Valuation 46
3.1 Introduction 46
3.2 Forwards and futures 48
3.3 The forward-spot parity 50
3.4 The basis and implied repo rate 51
CH$Chapter 4. FRAs and Interest Rate Futures 56
4.1 Forward rate agreements 56
4.2 FRA mechanics 57
4.3 Forward contracts 62
4.4 Short-term interest rate futures 63
CH$Chapter 5. Bond Futures 72
5.1 Introduction 72
5.2 Futures pricing 75
5.3 Hedging using bond futures 79
5.4 The margin process 84
Appendix 5.1 The conversion factor for the long gilt future 85
CH$Chapter 6. Swaps 88
6.1 Interest rate swaps 88
6.2 Generic swap valuation 94
6.3 Non-vanilla interest rate swaps 101
6.4 Currency swaps 103
6.5 Swaptions 106
6.6 An overview of interest rate swap applications 110
CH$Chapter 7. Credit Derivatives 116
7.1 Credit risk 116
7.2 Credit risk and credit derivatives 117
7.3 Credit event 119
7.4 An introduction to collateralised debt obligations (CDOs) 131
Appendix 7.1 Credit ratings 138
CH$Chapter 8. Equity Futures Contracts 139
8.1 Exchange-traded equity index and universal stock futures 139
8.2 Operational characteristics of equity futures contracts 147
CH$Chapter 9. Equity Swaps 160
9.1 A basic equity swap 160
9.2 Single-currency, fixed notional principal, equity index/sterling LIBOR swap 162
9.3 Equity swap: fair pricing 166
CH$Chapter 10. Equity and Equity Index Options 170
10.1 Call options 172
10.2 Put options 177
CH$Chapter 11. Option Pricing 204
11.1 Introduction 204
11.2 The Black and Scholes model 204
11.3 Alternative pricing frameworks 215
11.4 Monte Carlo simulation 230
CH$Chapter 12. Equity-linked Structured Products 234
12.1 Introduction 234
12.2 Convertible bonds 234
12.3 Currency considerations 255
12.4 Guaranteed equity products 257
IDX$Index 264