HD FULL Subject notes for ANU FINM2002

Description

Week 1 - Course Overview 2 Definitions 2 Futures 3 Example of closing out 3 Physical or Cash based Delivery 4 Options Contracts 4 Options vs Forwards and Futures 4 The Three Types of market participants: 5 Negative oil future price 5 Russian Nickel 5 Examples of Hedging 5 Week 2 - Forwards and Futures 6 Interest Rate Compounding 6 Example Question: Continuously Compounded 7 Short Selling 7 The Price of Forward and Futures 8 The Value of Foward 11 Hedging 12 Example for Cross Hedging and Optimal Hedge Ratio 13 Hedging using index futures 13 Week 3 - Interest Rate Contracts and Swaps 14 Introduction 14 Term structure and the yield curve 14 EXAMPLE - Price(PV) of a coupon paying bond 15 Spot and Forward Rates 15 EXAMPLE - Finding the forward rate from spot rates. 16 Interest Rate Swaps 17 BIG EXAMPLE – Interest Rate Swaps 18 EXAMPLE – Vs Commision 19 Value of Interest Rate Swaps 19 EXAMPLE - Value of Interest Rate Swaps 20 Interest Rate Swap for Investments 22 Week 4 - Option Basics 22 The moneyness of options 22 Dividends and Stock Splits 23 EXAMPLE - Dividends and Stock Splits 23 Stock option properties 24 Option Bounds 24 Upper bound for call option 25 Upper bound for put options 25 Lower bound for European call 25 Lower bound for European put 26 Lower bound for American call 26 Lower bound for American put 27 Put-Call Parity 27 Extensions - The Impact of Dividends 28 Violation of option price bounds - EXAMPLE 28 Week 5 - Binomial Option Pricing 29 Arbitrage-free replication approach 29 EXAMPLE 30 Extension 1 32 Delta-Hedging Approach 32 Traditional Approach 33 Foundations for risk-neutral approach 34 Application of risk-neutral approach - One period 36 Application of risk-neutral approach - Multi-period 36 Two-Step Binomial Tree 37 American options 38 EXAMPLE 38 Choosing u and d 40 Week 6 - Black Scholes Models for Pricing Options 40 The Distribution of Stock Prices 40 EXAMPLE - Stock Price Distribution 41 Assumptions of Black-Scholes 41 Intuition behind black-scholes 41 The Black-Scholes Model 42 The Black-Scholes Model with Dividends 43 Implied Volitility 43 Week 7 - Index and Foreign Exchange Options. 44 How does dividend affect stock price? 44 Options and Dividends 45 Options and Dividend Yields 46 Options on Stock Indices 47 Portfolio Insurance 48 Options on currencies 51 Binomial Tree Model with Dividend Yield 53 EXAMPLE - Binomial Tree Model with Dividend Yield 53 Week 8 - Options on Futures Contracts 54 Futures Options 54 EXAMPLE - Futures Options 55 Black-Scholes Model For Futures Options 55 EXAMPLE - Black-Scholes Model for Futures Options 56 Binomial Tree Model For Futures Options 57 EXAMPLE - Binomial Tree Model For Futures Options 58 Put-Call Parity for Futures Options 59 EXAMPLE - Put-Call Parity for Futures Options 59 Price Bounds for Futures Options 60 EXAMPLE – Price Bounds for Futures Options 60 Week 9 Lecture 1 - The Greek Letters 61 Introduction to Delta Hedging 62 EXAMPLE – Delta Hedging 63 Delta Hedging with Black Scholes Model 64 European Options on Assets Paying No Dividend 64 EXAMPLE – European Options on Assets Paying No Dividend 65 European Options on Assets Paying Dividend Yield q 66 EXAMPLE – European Options on Assets Paying Dividend Yield q 67 Dynamic Aspects of Delta Hedging 68 Delta of a Portfolio 68 EXAMPLE – Delta of a Portfolio 68 Gamma 69 Vega 69 Theta 69 Rho 70 Week 9 Lecture 2 - Option Trading Strategies 70 Introduction 70 Protective put 71 EXAMPLE – Protective put 71 Spreads – Bull Spread Using Calls 71 Spreads – Bear Spread Using Puts 73 Combinations – Straddle 75 Combinations – Strangle 76 Week 10 – Exotic Options and MBS 76 Introduction 76 Asian Options 77 EXAMPLE – Asian Options 77 Lookback Options 77 EXAMPLE – Lookback Options 78 Shout Options 78 EXAMPLE – Shout Options 79 Chooser Options 79 Barrier Options 80 Barrier Options – Knock-Out 80 Barrier Options – Knock-In 81 Binary Options 82 EXAMPLE – Binary Options 83 Use Binomial-tree to price Exotic options 84 EXAMPLE – Use binomial-tree to price exotic options 84 Structured Deposits 85 Mortgage-Backed Securities 86 Week 11 – Lecture 1 – Credit Default Swaps and Other Derivatives 87 Credit Default Swaps (CDS) 87 EXAMPLE – Credit Default Swaps(CDS) 89 ANOTHER EXAMPLE 90 Total Return Swap(TRS) 90 EXAMPLE – Total Return Swap 91 CAT bond 91 Weather Derivatives 91 EXAMPLE – Weather Derivatives 92 Energy Derivatives 92 Week 11 – Lecture 2 – Ethics in Risk Management 92 Derivatives Mishaps 92 Code of Ethics