An Introduction to Derivative Securities, Financial Markets, and Risk Management: 2nd Edition PDF
Preview An Introduction to Derivative Securities, Financial Markets, and Risk Management: 2nd Edition
AN INTRODUCTION TO DA eN Derivative Securities, Financial Markets, and Risk Management r iv IN a tT iR v eO FIRST EDITION ADOPTED IN MORE THAN 75 WHAT ADOPTERS ARE SAYING SD eU UNIVERSITIES IN 22 COUNTRIES cC “The text is pleasantly different from others in the market, u Written by two of the most distinguished finance scholars in especially the clarity of the explanations provided for the rT iI the industry, this introductory textbook on derivatives and risk concepts involved. The teaching slides provided are the best tiO e management is highly accessible in terms of the concepts as I have encountered to-date.” N s well as the mathematics. Dr Nagaratnam Jeyasreedharan , F TO University of Tasmania, Australia i With its economics perspective, this rewritten and streamlined n second edition textbook, is closely connected to real markets, a n and: c “I have read the whole book and I find it excellent. It’s a great i blend of theory and the ‘institutional’ aspects of derivatives a • Shows how macroeconomic forces have shaped the l markets trading.” M • Explains the major derivative pricing models using algebra Professor Rafael de Santiago a r and introductory calculus IESE Business School, Spain k e • Shows students how to implement these models using basic t s statistics and elementary Excel spreadsheet skills , “This book is a great resource for a rigorous introduction to a • Discusses the uses of derivatives while warning against derivatives, both pricing and markets. Thanks to an elaborate n their abuses set of detailed examples, references to relevant case studies, a d • Presents hard-to-teach interest rate derivatives in an intuitive full set of worked solutions to problem sets and slides, using R manner this book means reduced prep time without sacrificing the is AN INTRODUCTION TO students’ learning experience.” k • Presents the Heath–Jarrow–Morton model, which is the M most advanced derivatives pricing model, in an accessible Dr Thijs van der Heijden Derivative Securities, Financial Markets, manner by presenting it side-by-side with classical option University of Melbourne, Australia a n pricing theory a g .d e Bsaletnesudgsdo ieennnnnstgi snci,gna t enah ebte rae inb lpgeorv oogekfirl tagathdbraaulytda iutuse sacsel,oldy ma bdsfyo ew rbvteeaullbslo ialnpese st soM ts hl BomewA acsejoo rw nrdshti,ev oani srtwti soso,no us clctdhoie alwlnetoc giretesk, sa“bMoua tcyiht ku’osgn rrgdsor eeuhranasttvd ate onm idlneaicnatlegrun rodi aafe ldbd, eoa.”runivtd aa talilv ltleh steh h eha isis nbtoteerericen asptl uidnreegvl yea mlnoeapctmhdeeomntetasst, i ctthhaeel, ement vreser sthgir llA and Risk Management in the finance industry. .d e Professor Kevin Aretz tim University of Manchester, UK 2nd Ed. iL .e Second Edition SUPPLEMENTARY MATERIALS tP y ROBERT JARROW n a p • Extension sections in the book feature advanced topics “This book’s interest rate derivatives chapters are some of JA moC and current research insights not available in existing the best chapters I have read, because the authors have R gn textbooks tphreo vbidaseidc sa, ne xoaumtsptlaensd, ianngd apnrdac dtiicsatiln acptipvleic watoiorkn sin o fte ianctehriensgt RO ihsilbuP ARKADEV CHATTERJEA • Senodlu-otifo-cnhsa pMtearn quuael swtioithns d aentadi lperdo bsloelmutsions to nearly 500 rate derivatives and the Heath-Jarrow-MPororftoesns (oHrJ SMc)o mtt oFduenlg.” W • cifitneicS • PowerPoint slides and a Test Bank for adopters California State University, East Bay, USA C dlro W H .8 A 10 2 T © T th E giry R po C J E A World Scientific ISBN 978-1-944659-55-4 www.worldscientific.com World Scientific Y0018 hc Y0018_9781944659554_hc.indd All Pages 8/4/19 1:59 PM AN INTRODUCTION TO Derivative Securities, Financial Markets, and Risk Management Second Edition This page intentionally left blank AN INTRODUCTION TO Derivative Securities, Financial Markets, and Risk Management Second Edition ROBERT A. JARROW Cornell University ARKADEV CHATTERJEA Indiana University Bloomington World Scientific NEW JERSEY (cid:127) LONDON (cid:127) SINGAPORE (cid:127) BEIJING (cid:127) SHANGHAI (cid:127) HONG KONG (cid:127) TAIPEI (cid:127) CHENNAI (cid:127) TOKYO Publishedby WorldScientificPublishingCo.Inc. 27WarrenStreet,Suite401-402,Hackensack,NJ07601,USA Headoffice: 5TohTuckLink,Singapore596224 UKoffice: 57SheltonStreet,CoventGarden,LondonWC2H9HE LibraryofCongressCataloging-in-PublicationData Names:Jarrow,RobertA.,author.|Chatterjea,Arkadev,author. Title:Anintroductiontoderivativesecurities,financialmarkets,andriskmanagement/ RobertJarrow(CornellUniversity),ArkadevChatterjea(IndianaUniversity). Description:2ndedition.|NewJersey:WorldScientific,[2019]|Includesbibliographicalreferencesandindex. Identifiers:LCCN2018022534|ISBN9781944659554 Subjects:LCSH:Derivativesecurities.|Financialinstitutions.|Capitalmarket.|Riskmanagement. Classification:LCCHG6024.A3J37472018|DDC332.64/57--dc23 LCrecordavailableathttps://lccn.loc.gov/2018022534 BritishLibraryCataloguing-in-PublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary. Copyright©2019byRobertJarrowandArkadevChatterjea Allrightsreserved. F o r a n y a v a i l a b l e s u p p l e m entarymaterial,pleasevisit https://www.worldscientific.com/worldscibooks/10.1142/Y0018#t=suppl DeskEditors:KarimahSamsudinandShreyaGopi TypesetbydiacriTech PrintedinSingapore Bob: To my wife Gail for her patience and understanding. Arka: To my wife Sudeshna for her cheerful and steadfast support, and to our daughters Rushtri, Tvisha, and Roudra (all younger than the book!), who also cheerfully and proudly supported my writing. About the Authors Robert A. Jarrow is the Ronald P. and Susan E. Lynch Professor of Investment Management at the Samuel Curtis JohnsonGraduateSchoolofManagement,CornellSCJohnson CollegeofBusiness.Heisamongthemostdistinguishedfinance scholars of his generation. Jarrow has done research in nearly all areas of derivatives pricing. He is the co-developer of two widely used pricing models in finance, the Heath–Jarrow– Morton (HJM) model for pricing interest-rate derivatives and the reduced form model for pricing securities with credit risk. He is the author of more than 200 academic publications, seven books including Option Pricing (with Andrew Rudd, 1983),ModellingFixedIncomeSecuritiesandInterestRateOptions(1996),andDerivative Securities(withStuartTurnbull,2000),andseveraleditedvolumes. ArkadevChatterjeaisaVisitingProfessorofFinance,Kelley School of Business, Indiana University Bloomington. He is also aResearchFellowatUNCChapelHillandaVisitingFellowat CHERI,CornellUniversity.HedidhisPh.D.atCornell,where hewasastudentofJarrow.Earlier,hewasaprofessoroffinance at the Indian Institute of Management Calcutta. A winner of research and teaching awards in the USA, Chatterjea has taught derivatives at the above universities and at other institutions including CU Boulder, theHelsinkiSchool,HongKongUST,andIIMAhmedabad.PhotobyMr.KallolNath. Brief Contents About the Authors VI 17 Single-Period Binomial Model 367 Preface to Second Edition XXVII 18 Multiperiod Binomial Model 392 Preface to First Edition XXXI 19 TheBlack–Scholes–MertonModel 422 20 Using the Black–Scholes–Merton PART I Introduction Model 462 1 Derivatives and Risk Management 2 2 Interest Rates 22 PART IV Interest Rate 3 Stocks 53 Derivatives 4 Forwards and Futures 72 21 Yields and Forward Rates 496 5 Options 92 22 Interest Rate Swaps 538 6 Arbitrage and Trading 112 23 Single-Period Binomial Heath–Jarrow–Morton Model 558 7 Financial Engineering and Swaps 129 24 Multiperiod Binomial HJM Model 592 PART II Forwards and Futures 25 The Heath–Jarrow–Morton Libor Model 618 8 Forwards and Futures Markets 154 26 Risk Management Models 655 9 Futures Trading 172 10 Futures Regulations 192 Appendix A:Mathematics and Statistics 11 The Cost-of-Carry Model 209 684 Glossary 693 12 The Extended Cost-of-Carry Model 229 References 704 13 Futures Hedging 256 Notation 710 Additional Sources and Websites 712 PART III Options Books on Derivatives and Risk 14 Options Markets and Trading 288 Management 715 15 Option Trading Strategies 310 Name-Index 718 16 Option Relations 336 Subject-Index 720 This page intentionally left blank Contents AbouttheAuthorsVI PrefacetoSecondEditionXXVII PrefacetoFirstEditionXXXI PART I Introduction CHAPTER 1 Derivatives and Risk Management ..................... 2 1.1 Introduction 3 1.2 FinancialInnovation 5 ExpandingDerivativesMarkets 5 TwoEconomicMotives 7 1.3 TradedDerivativeSecurities 7 EXTENSION1.1: TheInfluenceofRegulations,Taxes,and TransactionCostsonFinancialInnovation 8 DiverseViewsonDerivatives 9 ApplicationsandUsesofDerivatives 10 AQuestforBetterModels 12 1.4 Defining,Measuring,andManagingRisk 12 1.5 TheRegulator’sClassificationofRisk 12 1.6 PortfolioRiskManagement 14 1.7 CorporateFinancialRiskManagement 14 RisksThatBusinessesFace 14 NonhedgedRisks 16 RiskManagementinaBlueChipCompany 16 1.8 RiskManagementPerspectivesinThisBook 17 1.9 Summary 18 1.10 Cases 19 1.11 QuestionsandProblems 19 IX
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