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Provides a logical, unifying approach to the valuation and hedging of all derivative securities, not just financial futures and stock options.

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CONTENTS
PREFACE = xvii
1 INTRODUCTION = 1
 1.1 Forward Contracts = 2
 1.2 Futures Contracts = 3
 1.3 Options = 5
 1.4 Other Derivative Securities = 9
 1.5 Types of Traders = 12
 1.6 Summary = 14
  Questions and Problems = 15
2 FUTURES MARKETS AND THE USE OF FUTURES FOR HEDGING = 18
 2.1 Trading Futures Contracts = 18
 2.2 The Specification of the Futures Contract = 19
 2.3 The Operation of Margins = 22
 2.4 Newspaper Quotes = 27
 2.5 Convergence of Futures Price to Spot Price = 32
 2.6 Cash Settlement = 33
 2.7 Hedging Using Futures = 33
 2.8 Optimal Hedge Ratio = 37
 2.9 Rolling the Hedge Forward = 39
 2.10 Summary = 40
  Suggestions for Further Reading = 42
  Questions and Problems = 42
3 FORWARD AND FUTURES PRICES = 45
 3.1 Some Preliminaries = 46
 3.2 Forward Contracts on a Security that Provides No Income = 51
 3.3 Forward Contracts on a Security that Provides a Known Cash Income = 53
 3.4 Forward Contracts on a Security that Provides a Known Dividend Yield = 54
 3.5 A General Result = 55
 3.6 Forward Prices versus Futures Prices = 56
 3.7 Stock Index Futures = 57
 3.8 Forward and Futures Contracts on Currencies = 63
 3.9 Futures on Commodities = 65
 3.10 The Cost of Carry = 69
 3.11 Delivery Options = 69
 3.12 Futures Prices and the Expected Future Spot Price = 70
 3.13 Summary = 72
  Suggestions for Further Reading = 74
  Questions and Problems = 75
  Appendix 3A: A Proof that Forward and Futures Prices Are Equal When Interest Rates Are Constant = 78
4 INTEREST RATE FUTURES = 80
 4.1 Some Preliminaries = 81
 4.2 Treasury Bond and Treasury Note Futures = 88
 4.3 Treasury Bill Futures = 94
 4.4 Eurodollar Futures = 98
 4.5 Duration = 99
 4.6 Duration-Based Hedging Strategies = 101
 4.7 Limitations of Duration = 103
 4.8 Summary = 105
  Suggestions for Further Reading = 106
  Questions and Problems = 106
5 SWAPS = 111
 5.1 Mechanics of Interest Rate Swaps = 111
 5.2 Valuation of Interest Rate Swaps = 118
 5.3 Currency Swaps = 123
 5.4 Valuation of Currency Swaps = 126
 5.5 Other Swaps = 128
 5.6 Credit Risk = 129
 5.7 Summary = 131
  Suggestions for Further Reading = 132
  Questions and Problems = 132
6 OPTIONS MARKETS = 136
 6.1 Exchange-Traded Options = 136
 6.2 Over-the-Counter Options = 138
 6.3 Specification of Stock Options = 138
 6.4 Newspaper Quotes = 142
 6.5 Trading = 144
 6.6 Margins = 145
 6.7 The Options Clearing Corporation = 147
 6.8 Warrants and Convertibles = 148
 6.9 Summary = 149
  Suggestions for Further Reading = 149
  Questions and Problems = 150
7 PROPERTIES OF STOCK OPTION PRICES = 151
 7.1 Factors Affecting Option Prices = 151
 7.2 Assumptions and Notation = 153
 7.3 Upper and Lower Bounds for Option Prices = 154
 7.4 Early Exercise: Calls on a Non-Dividend-Paying Stock = 158
 7.5 Early Exercise: Puts on a Non-Dividend-Paying Stock = 160
 7.6 Put-Call Parity = 163
 7.7 Effect of Dividends = 166
 7.8 Empirical Research = 167
 7.9 Summary = 169
  Suggestions for Further Reading = 170
  Questions and Problems = 170
8 TRADING STRATEGIES INVOLVING OPTIONS = 173
 8.t Strategies Involving a Single Option and a Stock = 173
 8.2 Spreads = 175
 8.3 Combinations = 183
 8.4 Other Payoffs = 184
 8.5 Summary = 187
  Suggestions for Further Reading = 188
  Questions and Problems = 188
9 A MODEL OF THE BEHAVIOR OF STOCK PRlCES = 190
 9.1 The Markov Property = 191
 9.2 Wiener Processes = 192
 9.3 The Process for Stock Prices = 196
 9.4 A Review of the Model = 198
 9.5 The Parameters = 200
 9.6 A Binomial Model = 201
 9.7 Summary = 204
  Suggestions for Further Reading = 204
  Questions and Problems = 205
10 THE BLACK-SCHOLES ANALYSIS = 207
 10.1 Ito's Lemma = 208
 10.2 The Lognomal Property of Stock Prices = 210
 10.3 The Distribution of the Rate of Return = 212
 10.4 Estimating Volatility from Historical Data = 214
 10.5 Option Valuation Using a Simple Binomial Model = 217
 10.6 Concepts Underlying the Black-Scholes Differential Equation = 218
 10.7 Derivation of the Black-Scholes Differential Equation = 219
 10.8 Risk-Neutral Valuation = 218
 10.9 The Black-Scholes Pricing Formulas = 224
 10.10 The Cumulative Normal Distribution Function = 226
 10.11 Warrants Issued by a Company on Its Own Stock = 228
 10.12 Implied Volatilities = 229
 10.13 The Causes of Volatility = 230
 10.14 Dividends = 232
 10.15 Summary = 237
  Suggestions for Further Reading = 238
  Questions and Problems = 239
  Appendix 10A: Derivation of Ito's Lemma = 243
  Appendix 10B: An Exact Procedure for Calculating the Values of American Calls on Dividend-Paying Stocks = 244
11 OPTIONS ON STOCK INDICES, CURRENCIES, AND FUTURES CONTRACTS = 247
 11.1 Options on Stocks Paying Known Dividend Yields = 247
 11.2 Options on Stock Indices = 249
 11.3 Currency Options = 255
 11.4 Futures Options = 258
 11.5 Summary = 265
  Suggestions for Further Reading = 267
  Questions and Problems = 267
  Appendix 11A: Derivation of Differential Equation Satisfied by a Derivative Security Dependent on a Stock Paying a Continuous Dividend Yield = 270
  Appendix 11B: Derivation of Differential Equation Satisfied by a Derivative Security Dependent on a Futures Price = 271
12 A GENERAL APPROACH TO PRICING DERIVATIVE SECURITIES = 274
 12.1 A Single Underlying Variable = 274
 12.2 Interest-Rate Risk = 278
 12.3 Securities Dependent on Several State Variables = 279
 12.4 Derivative Securities Dependent on Commodity Prices = 282
 12.5 Cross-Currency Futures and Options = 284
 12.6 Summary = 287
  Suggestions for Further Reading = 288
  Questions and Problems = 288
  Appendix 12A: A Generalization of Ito's Lemma = 290
  Appendix 12B: Derivation of the General Differential Equation Satisfied by Derivative Securities = 291
13 HEDGING POSITIONS IN OPTIONS AND OTHER DERIVATIVE SECURITIES = 295
 13.1 An Example = 295
 13.2 Naked and Covered Positions = 295
 13.3 A Stop-Loss Strategy = 296
 13.4 More Sophisticated Hedging Schemes = 298
 13.5 Delta Hedging = 298
 13.6 Theta = 307
 13.7 Gamma = 310
 13.8 The Relationship between Delta, Theta, and Gamma = 314
 13.9 Vega = 315
 13.10 Rho = 317
 13.11 Hedging Option Portfolios in Practice = 318
 13.12 Portfolio Insurance = 318
 13.13 Summary = 323
  Suggestions for Further Reading = 324
  Questions and Problems = 325
  Appendix 13A: Taylor Series Expansions and Hedge Parameters = 327
14 NUMERICAL PROCEDURES = 329
 14.1 Monte Carlo Simulation = 329
 14.2 Binomial Trees = 335
 14.3 Using the Binomial Tree for Options on Indices, Currencies, and Futures Contracts = 343
 14.4 The Binomial Model for a Dividend-Paying Stock = 345
 14.5 Extensions to the Basic Tree Approach = 348
 14.6 Avoiding Negative Probabilities = 351
 14.7 Finite Difference Methods = 352
 14.8 Analytic Approximations in Option Pricing = 362
 14.9 Summary = 362
  Suggestions for Further Reading = 363
  Questions and Problems = 364
  Appendix 14A: The Analytic Approximation to American Option Prices of MacMilllan, and Barone-Adesi and Whaley = 367
15 INTEREST RATE DERIVATIVE SECURITIES = 370
 15.1 Exchange-Traded Bond Options = 370
 15.2 Embedded Bond Options = 371
 15.3 Mortgage-backed Securities = 372
 15.4 Swaptions = 372
 15.5 Interest Rate Caps = 373
 15.6 Simple Approaches to Valuing Bond Options = 378
 15.7 Limitations of Simple Models = 383
 15.8 Traditional Approach Used by Researchers to Model the Term Structure = 383
 15.9 The Rendleman and Bartter Model = 385
 15.10 Mean Reversion = 388
 15.11 The Vasicek Model = 390
 15.12 The Cox, Ingersoll, and Ross Model = 396
 15.13 Two-Factor Models = 397
 15.14 No-Arbitrage Models = 398
 15.15 The Heath, Jarrow, and Morton Approach = 401
 15.16 The Ho and Lee Model = 403
 15.17 The Hull and White Model = 404
 15.18 Hedging = 408
 15.19 Summary = 409
  Suggestions for Further Reading = 410
  Questions and Problems = 411
16 EXOTIC OPTIONS = 414
 16.1 Types of Exotic Options = 415
 16.2 Basic Valuation Tools = 425
 16.3 American Path-Dependent Options = 426
 16.4 Options on Two Correlated Assets = 428
 16.5 Hedging Issues = 430
 16.6 Summary = 430
  Suggestions for Further Reading = 431
  Questions and Problems = 432
17 ALTERNATIVES TO BLACK-SCHOLES FOR OPTION PRICING = 434
 17.1 Known Changes in the Interest Rate and Volatility = 435
 17.2 Merton's Stochastic Interest Rate Model = 435
 17.3 Pricing Biases = 436
 17.4 Alternative Models = 439
 17.5 Overview of Pricing Biases = 444
 17.6 Empirical Research = 445
 17.7 How the Models Are Used in Practice = 448
 17.8 Summary = 448
  Suggestions for Further Reading = 449
  Questions and Problems = 451
  Appendix 17A: Pricing Formulas for Alternative Models = 452
18 CREDIT RISK = 455
 18.1 The Nature of the Exposure = 456
 18.2 Contracts that Are Unambiguously Assets = 459
 18.3 Contracts that Can Be Assets or Liabilities = 461
 18.4 The BIS Capital Requirements = 464
 18.5 Reducing Default Risk = 466
 18.6 Summary = 467
  Suggestions for Further Reading = 467
  Questions and Problems = 468
19 REVIEW OF KEY CONCEPTS = 469
 19.1 Riskless Hedges = 469
 19.2 Traded Securities versus Other Underlying Variables = 470
 19.3 Risk-Neutral Valuation = 470
 19.4 A Final Word = 471
TABLE FOR N(X) WHEN X ≤ 0 = 473
TABLE FOR N(X) WHEN X ≥ 0 = 474
WORLD EXCHANGES = 475
GLOSSARY OF NOTATION = 476
AUTHOR INDEX = 481
SUBJECT INDEX = 484