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Valuation and Risk Management

David A. Dubofsky and Thomas W. Miller

Publication Date - 05 September 2002

ISBN: 9780195114706

672 pages
7-1/2 x 9-1/4 inches

This book enables students to acquire a strong working knowledge and thorough understanding of financial derivatives.


Derivatives: Valuation and Risk Management, by David A. Dubofsky and Thomas W. Miller, Jr., enables students to acquire a strong working knowledge and thorough understanding of the rapidly growing field of financial derivatives. Students will learn essential risk management skills, such as how markets in these securities can be used to shift risk away from or toward the user.
With the purchase of this book, students will also have the unique opportunity to utilize Fincad XL-Dubofsky/Miller Edition, a limited version of FinancialCAD's comprehensive derivatives valuation toolkit, Fincad XL. The book features many examples using FinancialCAD's industry-leading package, affording students the chance to develop "real life" skills and helping business school students gain a competitive edge in the job market. Derivatives: Valuation and Risk Management is ideal for both undergraduate and graduate classes on derivatives, financial risk management, futures, or options.
Fincad XL is a software product currently used by thousands of financial practitioners and companies worldwide. Functions available in Fincad XL-Dubofsky/Miller Edition include: · Swaps · Forward Rates · Vanilla Options · Exotic Options · Fixed Income · Interest Rate Derivatives
To download your copy of Fincad XL-Dubofsky/Miller Edition, go to www.fincad.com/oxford. For more information on the complete version of Fincad XL, visit www.fincad.com.

Table of Contents

    1. An Overview of Derivative Contracts
    1.1. Forward Contracts and Futures Contracts
    1.2. Swaps
    1.3. Options
    1.4. Why Is It Important to Learn About Derivatives?
    1.5. Summary
    2. Risk and Risk Management
    2.1. What Is Risk?
    2.2. How Is Risk Managed?
    2.3. Should Firms Manage Risk?
    2.4. What Should Be Done After Risk Exposures Have Been Identified?
    2.5. Accounting for Derivatives: FAS 133
    2.6. Summary
    3. Introduction to Forward Contracts
    3.1. General Concepts
    3.2. Forward Rate Agreements
    3.3. Forward Foreign Exchange Contracts
    3.4. Summary
    4. Using Forward Contracts to Manage Risk
    4.1. Using Forwards to Manage Commodity Price Risk
    4.2. Using Forwards to Manage Interest Rate Risk
    4.3. Using Forward Foreign Exchange Contracts to Manage Risk
    4.4. What Quantity Should Be Bought or Sold Forward?
    4.5. Summary
    5. Determining Forward Prices and Futures Prices
    5.1. Forward Commodity Prices
    5.2. Forward Exchange Rates
    5.3. Forward Interest Rates
    5.4. Summary
    6. Introduction to Futures
    6.1. Futures Contracts and Forward Contracts
    6.2. Margin Requirements for Futures Contracts
    6.3. Marking to Market
    6.4. Basis and Convergence
    6.5. Should Futures Prices Equal Forward Prices?
    6.6. Futures Contracts, Exchanges, and Regulation
    6.7. The Purposes of Futures Markets
    6.8. Reading Futures Prices in the Wall Street Journal
    6.9. Limits on Price Fluctuations
    6.10. Orders and Position Limits
    6.11. Individuals in the Futures Industry
    6.12. Taxes and Commissions
    6.13. Summary
    7. Risk Management with Futures Contracts
    7.1. Introduction
    7.2. Some Special Considerations in Hedging with Futures
    7.3. The Hedge Ratio
    7.4. Tailing the Hedge
    7.5. Managing the Futures Hedge
    7.6. Summary
    8. Stock Index Futures
    8.1. What Is An Index?
    8.2. Pricing Stock Index Futures
    8.3. Risk Management With Stock Index Futures
    8.4. Summary
    9. Treasury Bond and Treasury Note Futures
    9.1. Features of the T-Bond Futures Contracts
    9.2. Determining T-Bond and T-Note Futures Prices
    9.3. Using T-Bond Futures to Shift Interest Rate Risk
    9.4. Advanced Applications of T-Bond and T-Note Futures Contracts
    9.5. Summary
    10. Treasury Bill and Eurodollar Features
    10.1. The Spot Treasury Bill Market
    10.2. T-Bill Futures Contracts
    10.3. The Eurodollar Cash Market
    10.4. Eurodollar Futures Contracts
    10.5. Two Useful Applications of Eurodollar Futures Contracts
    10.6. Hedging with Short-Term Interest Rate Futures
    10.7. Eurodollar Bundles and Packs
    10.8. Summary
    11. An Introduction to Swaps
    11.1. Interest Rate Swaps
    11.2. Currency Swaps
    11.3. Commodity Swaps
    11.4. Equity Index Swaps
    11.5. Credit Risk in Swaps and Credit Swaps
    11.6. Summary
    12. Using Swaps to Manage Risk
    12.1. Using Interest Rate Swaps
    12.2. Using Currency Swaps
    12.3. Using Commodity Swaps
    12.4. Using Equity Swaps
    12.5. Using Index Swaps
    12.6. Using Diff Swaps
    12.7. Summary
    13. Pricing and Valuing Swaps
    13.1. Pricing and Valuing Plain Vanilla Fixed Floating Interest Rate Swaps
    13.2. Pricing a Currency Swap
    13.3. Pricing a Commodity Swap
    13.4. Summary
    14. Introduction to Options
    14.1. Call Options
    14.2. Put Options
    14.3. In the Money, At the Money, Out of the Money
    14.4. Intrinsic Value and Time Value
    14.5. Payout Protection
    14.6. Pricing at Expiration
    14.7. A Brief Look at Option Pricing Before Expiration
    14.8. Stock Options Markets
    14.9. Reading Options Prices in the Financial Press
    14.10. Transaction Costs
    14.11. Margin
    14.12. Taxes
    14.13. Index Options
    14.14. Foreign Exchange Options
    14.15. Futures Options
    14.16. Other Options
    14.17. Summary
    15. Options Strategies and Profit Diagrams
    15.1. Profit Diagrams for Long Stock and Short Stock
    15.2. Long Calls
    15.3. Writing a Naked Call
    15.4. Long Puts
    15.5. Writing a Naked Put
    15.6. Covered Call Writing
    15.7. Vertical Spreads
    15.8. Straddles and Strangles
    15.9. Synthetic Forward
    15.10. Other Strategies
    15.11. Ratio-of-Return Diagrams
    15.12. Profit Diagrams for Different Holding Periods
    15.13. Several Caveats
    15.14. Research on Option Strategies
    15.15. Summary
    16. Arbitrage Restrictions on Option Prices
    16.1. Notation
    16.2. Pricing Restrictions for Calls
    16.3. Puts
    16.4. Put-Call Parity
    16.5. Box Spreads Using European Options
    16.6. Summary
    17. The Binomial Option Pricing Model
    17.1. A Quiz
    17.2. Deriving the Binomial Option Pricing Model for Calls on Non-Dividend-Paying Stocks
    17.3. Using the Binomial Option Pricing Model to Value Calls on Dividend-Paying Stocks
    17.4. Puts
    17.5. Portfolio Insurance and Dynamic Trading
    17.6. Other References on the BOPM and Dynamic Trading
    17.7. Summary
    18. Continuous Time Option Pricing Models
    18.1. The Black-Scholes Option Pricing Model
    18.2. The Black-Scholes Option Pricing Model and a Detailed Numerical Example
    18.3. An Intuitive Look at the Black-Scholes Option Pricing Model
    18.4. The Black-Scholes Option Pricing Model and European Put Prices
    18.5. Two Handy Extensions of the Black-Scholes Option Pricing Model
    18.6. The Relationship Between the Binomial Option Pricing Model and the Black-Scholes Option Pricing Model
    18.7. The Nettlesome Task of Estimating a Security's Volatility
    18.8. Generalizing the Black-Scholes Option Pricing Model
    18.9. Options on Futures Contracts
    18.10. American Call Options
    18.11. Summary
    19. Risk Management for Using Options
    19.1. The Greeks
    19.2. The Importance of Delta
    19.3. Riskless Hedging
    19.4. Position Deltas and Gammas
    19.5. Caps, Floors, and Collars: Using Options to Manage Interest Rate Risk
    19.6. Summary
    20. Current Topics in Risk Management
    20.1. Value at Risk (VaR)
    20.2. Credit Derivatives and Options on Debt Instruments
    20.3. Exotic Options
    20.4. Summary