NINTH EDITION - University of São Paulo

1 NINTH EDITIONOPTIONS, FUTURES,AND OTHER DERIVATIVESThis page intentionally left blank NINTH EDITIONOPTIONS, FUTURES,AND OTHER DERIVATIVESJohn C. HullMaple Financial Group Professor of Derivatives and Risk ManagementJoseph L. Rotman School of ManagementUniversity of TorontoBoston Columbus Indianapolis New York San Francisco Upper Saddle RiverAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City Sa o Paulo Sydney Hong Kong Seoul Singapore Taipei TokyoEditor in Chief:Donna BattistaEditorial Project Manager:Erin McDonaghEditorial Assistant:Elissa Senra-SargentManaging Editor:Jeff HolcombProject Manager:Alison KalilSenior Manufacturing Buyer:Carol MelvilleAssociate Project Manager, Permissions:Samantha GrahamArt Director:Jayne ConteCover Art:#V.

2 Yakobchuk/FotoliaExecutive Media Producer:Melissa HonigText Composition:The Geometric PressPrinter/Binder:Courier KendallvilleCover Printer:Lehigh-Phoenix/HagerstownText Font:10/12 pt Monotype TimesCredits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appearon appropriate page within #2015, 2012, 2009 by Pearson Education, Inc. All rights reserved. Manufactured in the United States ofAmerica. This publication is protected by Copyright, and permission should be obtained from the publisher prior toany prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic,mechanical, photocopying, recording, or likewise.

3 To obtain permission(s) to use material from this work, pleasesubmit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River,New Jersey 07458, or you may fax your request to of the designations by manufacturers and sellers to distinguish their products are claimed as those designations appear in this book, and the publisher was aware of a trademark claim, the designationshave been printed in initial caps or all of Congress Cataloging-in-Publication DataHull, JohnOptions, futures, and other derivatives / John C. Hull, University of Toronto. NINTH Futures. 2. Stock options. 3. Derivative securities.

4 I. 5 dc23201304232410987654 321 ISBN-10: 0-13-345631-5 ISBN-13: 978-0-13-345631-8To MichelleCONTENTS IN BRIEFList of Business of Technical Mechanics of futures markets .. 243. Hedging strategies using 494. Interest rates .. 775. Determination of forward and futures 1046. Interest rate futures .. 1327. Swaps .. 1528. Securitization and the credit crisis of 1859. OIS discounting, credit issues, and funding costs .. 20010. Mechanics of options markets .. 21311. Properties of stock 23412. Trading strategies involving options .. 25413. Binomial trees .. 27414. Wiener processes and Ito s lemma .. 30215. The Black Scholes Merton 32116.

5 Employee stock 35417. Options on stock indices and currencies .. 36718. Futures options .. 38319. The Greek 39920. Volatility smiles .. 43121. Basic numerical procedures .. 45022. Value at risk .. 49423. Estimating volatilities and correlations .. 52124. Credit risk .. 54425. Credit derivatives .. 57126. Exotic 59827. More on models and numerical 62428. Martingales and measures .. 65529. Interest rate derivatives: The standard market 67330. Convexity, timing, and quanto 69331. Interest rate derivatives: Models of the short 70632. HJM, LMM, and multiple zero 74033. Swaps 76034. Energy and commodity derivatives .. 77535. Real options.

6 79236. Derivatives mishaps and what we can learn from 806 Glossary of terms .. 818 DerivaGem 840 Major exchanges trading futures and 845 Tables forN x .. 846 Author 847 Subject 852 ContentsList of Business of Technical .. xixChapter 1. Exchange-traded markets .. Over-the-counter Forward Futures contracts .. Options .. Types of Speculators .. 18 Further reading .. 19 Practice 19 Further 21 Chapter 2. Mechanics of futures Background .. Specification of a futures Convergence of futures price to spot The operation of margin accounts .. OTC Market Types of traders and types of Regulation.

7 Accounting and Forward vs. futures 44 Further reading .. 45 Practice 45 Further 47 Chapter 3. Hedging strategies using Basic Arguments for and against hedging .. Basis Cross hedging .. Stock index Stack and 68 Summary .. 70 Further 70 Practice 71 Further 73 Appendix: Capital asset pricing 75 Chapter 4. Interest rates .. Types of Measuring interest rates .. Zero rates .. Bond pricing .. Determining Treasury zero rates .. Forward Forward rate agreements .. Theories of the term structure of interest 96 Summary .. 98 Further 99 Practice 99 Further 102 Chapter 5.

8 Determination of forward and futures Investment assets vs. consumption assets .. Short Assumptions and Forward price for an investment asset .. Known income .. Known Valuing forward contracts .. Are forward prices and futures prices equal? .. Futures prices of stock Forward and futures contracts on currencies .. Futures on commodities .. The cost of Delivery Futures prices and expected future spot prices .. 124 Summary .. 126 Further 128 Practice 128 Further 130 Chapter 6. Interest rate Day count and quotation conventions .. Treasury bond Eurodollar futures.

9 Duration-based hedging strategies using futures .. Hedging portfolios of assets and liabilities .. 147 Summary .. 147 Further 148 Practice 148 Further 150viiiContentsChapter 7. Mechanics of interest rate swaps .. Day count Confirmations .. The comparative-advantage argument .. The nature of swap Determining the LIBOR/swap zero rates .. Valuation of interest rate Term structure effects .. Fixed-for-fixed currency swaps .. Valuation of fixed-for-fixed currency Other currency swaps .. Credit risk .. Other types of reading ..181 Practice 8. Securitization and the credit crisis of 2007 .. The US housing What went wrong?

10 The aftermath .. reading ..197 Practice 9. OIS discounting, credit issues, and funding costs .. The risk-free rate .. The OIS Valuing swaps and FRAs with OIS discounting .. OIS vs. LIBOR: Which is correct?.. Credit risk: CVA and DVA .. Funding reading ..211 Practice 10. Mechanics of options markets .. Types of Option Underlying Specification of stock options .. Trading .. Margin requirements .. The options clearing Regulation .. Warrants, employee stock options, and convertibles .. Over-the-counter options .. 230 Further 231 Practice 231 Further 232 Chapter 11. Properties of stock Factors affecting option Assumptions and Upper and lower bounds for option Put call Calls on a non-dividend-paying Puts on a non-dividend-paying Effect of dividends.