Options-Futures-and-Other-Derivatives-John-C.Hull(

Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.1IntroductionChapter1Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.2TheNatureofDerivativesAderivativeisaninstrumentwhosevaluedependsonthevaluesofothermorebasicunderlyingvariablesOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.3ExamplesofDerivatives•FuturesContracts•ForwardContracts•Swaps•OptionsOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.4DerivativesMarketsExchangetradedTraditionallyexchangeshaveusedtheopen-outcrysystem,butincreasinglytheyareswitchingtoelectronictradingContractsarestandardthereisvirtuallynocreditriskOver-the-counter(OTC)Acomputer-andtelephone-linkednetworkofdealersatfinancialinstitutions,corporations,andfundmanagersContractscanbenon-standardandthereissomesmallamountofcreditriskOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.5SizeofOTCandExchangeMarkets(Figure1.1,Page3)Source:BankforInternationalSettlements.ChartshowstotalprincipalamountsforOTCmarketandvalueofunderlyingassetsforexchangemarket020406080100120140160180200220240Jun-98Jun-99Jun-00Jun-01Jun-02Jun-03Jun-04SizeofMarket($trillion)OTCExchangeOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.6WaysDerivativesareUsedTohedgerisksTospeculate(takeaviewonthefuturedirectionofthemarket)TolockinanarbitrageprofitTochangethenatureofaliabilityTochangethenatureofaninvestmentwithoutincurringthecostsofsellingoneportfolioandbuyinganotherOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.7ForwardContractsForwardcontractsaresimilartofuturesexceptthattheytradeintheover-the-countermarketForwardcontractsareparticularlypopularoncurrenciesandinterestratesOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.8ForeignExchangeQuotesforGBPJune3,2003(Seepage4)BidOfferSpot1.62811.62851-monthforward1.62481.62533-monthforward1.61871.61926-monthforward1.60941.6100Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.9ForwardPriceTheforwardpriceforacontractisthedeliverypricethatwouldbeapplicabletothecontractifwerenegotiatedtoday(i.e.,itisthedeliverypricethatwouldmakethecontractworthexactlyzero)TheforwardpricemaybedifferentforcontractsofdifferentmaturitiesOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.10TerminologyThepartythathasagreedtobuyhaswhatistermedalongpositionThepartythathasagreedtosellhaswhatistermedashortpositionOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.11Example(page4)OnJune3,2003thetreasurerofacorporationentersintoalongforwardcontracttobuy£1millioninsixmonthsatanexchangerateof1.6100Thisobligatesthecorporationtopay$1,610,000for£1milliononDecember3,2003Whatarethepossibleoutcomes?Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.12ProfitfromaLongForwardPositionProfitPriceofUnderlyingatMaturity,STKOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.13ProfitfromaShortForwardPositionProfitPriceofUnderlyingatMaturity,STKOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.14FuturesContracts(page6)AgreementtobuyorsellanassetforacertainpriceatacertaintimeSimilartoforwardcontractWhereasaforwardcontractistradedOTC,afuturescontractistradedonanexchangeOptions,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.15ExchangesTradingFuturesChicagoBoardofTradeChicagoMercantileExchangeLIFFE(London)Eurex(Europe)BM&F(SaoPaulo,Brazil)TIFFE(Tokyo)andmanymore(seelistatendofbook)Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.16ExamplesofFuturesContractsAgreementto:buy100oz.ofgold@US$400/oz.inDecember(NYMEX)sell£62,500@1.5000US$/£inMarch(CME)sell1,000bbl.ofoil@US$20/bbl.inApril(NYMEX)Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.171.Gold:AnArbitrageOpportunity?Supposethat:ThespotpriceofgoldisUS$300The1-yearforwardpriceofgoldisUS$340The1-yearUS$interestrateis5%perannumIsthereanarbitrageopportunity?Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.182.Gold:AnotherArbitrageOpportunity?Supposethat:-ThespotpriceofgoldisUS$300-The1-yearforwardpriceofgoldisUS$300-The1-yearUS$interestrateis5%perannumIsthereanarbitrageopportunity?Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.19TheForwardPriceofGoldIfthespotpriceofgoldisSandtheforwardpriceforacontractdeliverableinTyearsisF,thenF=S(1+r)Twhereristhe1-year(domesticcurrency)risk-freerateofinterest.Inourexamples,S=300,T=1,andr=0.05sothatF=300(1+0.05)=315Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.201.Oil:AnArbitrageOpportunity?Supposethat:-ThespotpriceofoilisUS$19-Thequoted1-yearfuturespriceofoilisUS$25-The1-yearUS$interestrateis5%perannum-Thestoragecostsofoilare2%perannumIsthereanarbitrageopportunity?Options,Futures,andOtherDerivatives,6thEdition,Copyright©JohnC.Hull20051.212.Oil:AnotherArbitrageO