Description
Our purpose in writing this text is to make the theory and practice of pricing and hedging derivative securities accessible to undergraduates and MBA students, as well as practitioners. We have five explicit objectives.
First, the book reflects both option pricing theory and practice and futures pric- ing theory and practice. In practice, options on an underlying asset are often hedged with futures on the same underlying asset. This is because futures are viewed as more liquid than the underlying asset. For example, in the over-the-counter swap market Eurodollar futures are considered the preferred instrument for hedging, and in the stock index options market futures on the same stock index are the preferred hedging vehicle.
Current pricing theory, which is based on martingale methods, adopts a unified approach to all forms of derivatives, such as options and futures. Thus theory and practice dictate a new approach to teaching derivative securities. In this text we adopt this new direction, presenting a unified approach to pricing and hedging derivative securities. As such, our text differs from existing books, which either concentrate on options with little or no futures material or on futures with little or no options material.
Second, the book covers diverse areas such as equity and index derivatives, foreign currency derivatives, and commodity derivatives, as well as interest rate derivatives. Given the recent expansion in the trading of exotic options, any relevant text must include this material.
Third, the book addresses the issue of how to incorporate credit risk into the pricing and risk management of derivatives. Our text provides a clear, self-contained ex- planation of how to incorporate credit risk and gives many numerical examples.
Fourth, the book is a useful guide for pricing and hedging any derivative security, included in the text or not. To achieve this goal, the book includes all proofs and/or necessary references. As such, the level of detail included is higher than that contained in other books in this area, but without any additional mathematical complexity.
ISBN:9780538877404
