Exam (elaborations) TEST BANK FOR Fundamentals of Futures and Options Markets 8th Edition By John Hull (Students Solutions Manual and Study Guide)
... [Show More]
Pearson New International Edition
Student's Solutions Manual & Study Guide
for Fundamentals of Futures
and Options Markets
John C. Hull Eighth Edition
Table of Contents
P E A R S O N C U S T O M L I B R A R Y
I
Student's Solutions Manual and Study Guide for Introduction
John C. Hull 1
Student's Solutions Manual and Study Guide for Mechanics of Futures Markets
John C. Hull 7
Student's Solutions Manual and Study Guide for Hedging Strategies Using Futures
John C. Hull 13
Student's Solutions Manual and Study Guide for Interest Rates
John C. Hull 19
Student's Solutions Manual and Study Guide for Determination of Forward and Future Prices
John C. Hull 25
Student's Solutions Manual and Study Guide for Interest Rate Futures
John C. Hull 33
Student's Solutions Manual and Study Guide for Swaps
John C. Hull 41
Student's Solutions Manual and Study Guide for Securitization and the Credit Crisis of 2007
John C. Hull 49
Student's Solutions Manual and Study Guide for Mechanics of Options Markets
John C. Hull 53
Student's Solutions Manual and Study Guide for Properties of Stock Options
John C. Hull 61
Student's Solutions Manual and Study Guide for Trading Strategies Involving Options
John C. Hull 67
Student's Solutions Manual and Study Guide for Introduction to Binomial Trees
John C. Hull 73
Student's Solutions Manual and Study Guide for Valuing Stock Options: The Black-Scholes-Merton Model
John C. Hull 83
II
Student's Solutions Manual and Study Guide for Employee Stock Options
John C. Hull 93
Student's Solutions Manual and Study Guide for Options on Stock Indices and Currencies
John C. Hull 97
Student's Solutions Manual and Study Guide for Futures Options
John C. Hull 105
Student's Solutions Manual and Study Guide for The Greek Letters
John C. Hull 113
Student's Solutions Manual and Study Guide for Binomial Trees in Practice
John C. Hull 125
Student's Solutions Manual and Study Guide for Volatility Smiles
John C. Hull 135
Student's Solutions Manual and Study Guide for Value at Risk
John C. Hull 143
Student's Solutions Manual and Study Guide for Interest Rate Options
John C. Hull 149
Student's Solutions Manual and Study Guide for Exotic Options and Other Nonstandard Products
John C. Hull 155
Student's Solutions Manual and Study Guide for Credit Derivatives
John C. Hull 161
Index 167
CHAPTER 1
Introduction
This chapter introduces futures, forward, and option contracts and explains the traders that use
them. If you already know how futures, forwards, and options work, you will not have to spend
too much time on this chapter. Note that Chapter 1 does not distinguish between futures and
forward contracts. Both are agreements to buy or sell an asset at a certain time in the future for a
certain price. It is Chapter 2 that covers the daily settlement feature of futures contracts and
itemizes the differences between the two types of contract.
Make sure you understand the key difference between futures (or forwards) and options. Futures
and forwards are obligations to enter into a transaction in the future. An option is the right to
enter into a transaction in the future. A futures or forward contract may prove to be an asset or a
liability (depending on how the price of the underlying asset evolves). An option is always an
asset to the buyer of the option and a liability to the seller of the option. It costs money (the
option premium) to purchase an option. There is no cost (except for margin/collateral
requirements which are discussed in Chapter 2) when a futures or forward contract is entered
into. Table 1.1 shows forward foreign exchange quotes. Tables 1.2 and 1.3 show the prices of
options on Google. Make sure you understand what the numbers in these tables mean and how
the profit diagrams in Figure 1.3 are constructed.
The distinction between over-the-counter and exchange-traded markets is important. As Figure
1.2 indicates, the OTC market was about ten times the size of the exchange-traded market at the
end of 2011. Exchange-traded markets are markets where the contracts are defined by an
exchange such as the CME Group. How trading is done, how payments flow from one side to the
other, and so on is determined by the exchange. A key point is that the exchange (or, strictly
speaking, the exchange clearing house) stands between the two sides and organizes trading so
that there is virtually no credit risk.
The over-the-counter (OTC) market is primarily a market between financial institutions, nonfinancial
corporations, and fund managers. Traditionally, OTC market participants have
communicated and agreed on trades by phone or electronically. An exchange is not involved.
However, as a result of regulatory initiatives, the OTC market is becoming more like the
exchange-traded market. Three important regulatory initiatives are:
1. Standard OTC derivatives in the U.S. must whenever possible be traded by swap
execution facilities. These are platforms where market participants can post bid and offer
quotes and where they can do a trade by accepting the bid or offer quote of another
market participant.
2. Central clearing parties must be used for standard OTC derivatives. Their role is to stand
between the two sides in the same way that the exchange clearing house does in the
exchange-traded market.
3. All trades must be reported to a central registry.
From Chapter 1 of Student’s Solutions Manual and Study Guide for Fundamentals of Futures and Options Markets,
Eighth Edition. John C. Hull. Copyright © 2014 by Pearson Education, Inc. All rights reserved.
1
The chapter identifies the three main types of trader that use forward, futures, and options
markets. Hedgers use the markets to reduce their risk exposure to a market variable such as an
exchange rate, a commodity price, or an interest rate. Speculators use the market to take a
position on the future direction of a market variable. Arbitrageurs attempt to lock in a riskless
profit by simultaneously entering into transactions in two or more markets. The chapter gives
examples of the activities of the three types of traders. Hedge funds (see Business Snapshot 1.3)
use derivatives for all three purposes. As the SocGen example (Business Snapshot 1.4) shows,
one of the dangers in derivatives markets is that a trader will use derivatives for unauthorized
speculation and lose a lot of money before the [Show Less]