An Introduction to Equity Derivatives / Wiley Finance Series (PDF)

Table of Contents iii Part I. Building Blocks xiii 1. Interest Rate 1 1.Measuring time 1 2. Interest rate 1 3. Discounting 3 4. Problems 4 2. Classical Investment Rules 7 1. Rate of return. Time of return 7 2. Net present value (NPV) 8 3. Internal rate of return (IRR) 9 4. Other investment rules 9 5. Further reading 10 6. Problems 10 3. Fixed markets 13 1. Financial markets 13 2. Bonds 15 3. Yield 16 4. Zero-coupon yield curve. Arbitrage price 18 5. Further reading 21 6. Problems 21 4. Portfolio Theory 25 1. Risk and return of an asset 25 2. Risk and return of a portfolio 27 3. Gains of diversification. Portfolio optimization 30 4. Capital Asset Pricing Model 31 5. Further reading 32 6. Problems 32 Part II. First Steps in Equity Derivatives 35 5. Equity Derivatives 37 1. Introduction 37 2. Forward contracts 38 3. 'Plain vanilla' options 42 4. Further reading 47 5. Problems 47 6. The Binomial Model 51 1. One-step binomial model 51 2. Multi-step binomial trees 53 3. Binomial valuation algorithm 54 4. Further reading 56 5. Problems 56 7. The Lognormal Model 59 1. Fair value 59 2. Closed-form formulas for European options 60 3. Monte-Carlo method 61 4. Further reading 62 5. Problems 62 8. Dynamic Hedging 67 1. Hedging option risks 67 2. The P&L of delta-hedged options 69 3. Further reading 72 4. Problems 72 Part III. Advanced Models and Techniques 75 9. Models for Asset Prices in Continuous Time 77 1. Continuously compounded interest rate 77 2. Introduction to models for the behavior of asset prices in continuous time 78 3. Introduction to stochastic processes 79 4. Introduction to stochastic calculus 81 5. Further reading 83 6. Problems 83 10. The Black-Scholes Model 87 1. The Black-Scholes partial differential equation 87 2. The Black-Scholes formulas for European vanilla options 89 3. Volatility 90 4. Further reading 91 5. Problems 81 11. Volatility Trading 95 1. Implied and realized volatilities 95 2. Volatility trading using options 96 3. Volatility trading using

SÉBASTIEN BOSSU is currently Principal at Ogee
Consulting, a startup company based in New York doing cutting-edge
research on derivatives, investment management and software
development. A former director of Equity Derivatives Structuring
for an investment bank in London, he also worked at J.P. Morgan as
an exotics structurer. He is a graduate from The University of
Chicago, HEC Paris, Columbia University and Université Pierre
et Marie Curie.

PHILIPPE HENROTTE is Head of Financial Theory and
Research at ITO 33, a company which designs sophisticated
derivatives pricing software for hedge funds and financial
institutions; and an Affiliate Professor of Finance at HEC Paris.
An expert in asset pricing and derivatives hedging, he earned his
PhD from Stanford University after graduating from Ecole
Polytechnique de Paris.

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