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Use Derivatives Risk Management Essay

Preface To The New Edition.

Preface To The First Edition.

Section One. Derivatives And Their Markets.

Essay 1. The Structure Of Derivative Markets.

Essay 2. A Brief History Of Derivatives.

Essay 3. Why Derivatives?

Essay 4. Forward Contracts And Futures Contracts.

Essay 5. Options.

Essay 6. Swaps.

Essay 7. Types Of Risks.

Section Two. The Basic Instruments.

Essay 8. Interest Rate Derivatives: FRAs And Options.

Essay 9. Interest Rate Derivatives: Swaps.

Essay 10. Currency Swaps.

Essay 11. Structured Notes.

Essay 12. Securitized Instruments.

Essay 13. Equity Swaps.

Essay 14. Equity-Linked Debt.

Essay 15. Commodity Swaps.

Essay 16. American Versus European Options.

Essay 17. Swaptions.

Essay 18. Credit Derivatives.

Essay 19. Volatility Derivatives.

Essay 20. Weather And Environmental Derivatives.

Section Three. Derivative Pricing.

Essay 21. Forward And Futures Pricing.

Essay 22. Put-Call Parity For European Options On Assets.

Essay 23. Put-Call Parity For American Options On Assets.

Essay 24. Call Options As Insurance And Margin.

Essay 25. A Nontechnical Introduction To Brownian Motion.

Essay 26. Building A Model Of Brownian Motion In The Stock Market.

Essay 27. Option Pricing: The Black-Scholes-Merton Model.

Essay 28. Option Pricing: The Binomial Model.

Essay 29. Option Pricing: Numerical Methods.

Essay 30. Dynamic Option Replication.

Essay 31. Risk-Neutral Pricing Of Derivatives: I.

Essay 32. Risk-Neutral Pricing Of Derivatives: II.

Essay 33. It's All Greek To Me.

Essay 34. Implied Volatility.

Essay 35. American Call Option Pricing.

Essay 36. American Put Option Pricing.

Essay 37. Swap Pricing.

Section Four. Derivative Strategies.

Essay 38. Asset Allocation With Derivatives.

Essay 39. Protective Puts And Portfolio Insurance.

Essay 40. Misconceptions About Covered Call Writing.

Essay 41. Hedge Funds And Other Privately Managed Accounts.

Essay 42. Spreads, Collars, And Prepaid Forwards.

Essay 43. Box Spreads.

Section Five. Exotic Instruments.

Essay 44. Barrier Options.

Essay 45. Straddles And Chooser Options.

Essay 46. Compound And Installment Options.

Essay 47. Digital Options.

Essay 48. Geographic Options.

Essay 49. Multi-Asset Options.

Essay 50. Range Forwards And Break Forwards.

Essay 51. Lookback Options.

Essay 52. Deferred Start And Contingent Premium Options.

Section Six. Fixed Income Securities And Derivatives.

Essay 53. Duration.

Essay 54. Limitations Of Duration And The Concept Of Convexity.

Essay 55. The Term Structure Of Interest Rates.

Essay 56. Theories Of The Term Structure: I.

Essay 57. Theories Of The Term Structure: II.

Essay 58. Simple Models Of The Term Structure: Vasicek And Cox-Ingersoll-Ross.

Essay 59. No-Arbitrage Models Of The Term Structure: Ho-Lee And Heath-Jarrow-Morton.

Essay 60. Tree Pricing Of Bond And Interest Rate Derivatives: I.

Essay 61. Tree Pricing Of Bonds And Interest Rate Derivatives: II.

Essay 62. Tree Pricing Of Bonds And Interest Rate Derivatives: III.

Essay 63. Tree Pricing Of Bonds And Interest Rate Derivatives: IV.

Essay 64. Tree Pricing Of Bonds And Interest Rate Derivatives: V.

Section Seven. Other Topics And Issues.

Essay 65. Stock Options.

Essay 66.Value At Risk.

Essay 67. Stock As An Option .

Essay 68. The Credit Risk Of Derivatives.

Essay 69. Operational Risk.

Essay 70. Risk Management In An Organization.

Essay 71. Accounting And Disclosure Of Derivatives.

Essay 72. Worst Practices In Derivatives.

Essay 73. Best Practices In Derivatives.

Recommended Reading.

Answers To End-Of-Essay Questions.

Answer to Chapter 1 Introduction to Derivatives & Risk Management, Chance, Brooks.

1565 WordsJan 30th, 20127 Pages

CHAPTER 1: INTRODUCTION

END-OF-CHAPTER QUESTIONS AND PROBLEMS

1. (Market Efficiency and Theoretical Fair Value) An efficient market is one in which prices reflect the true economic values of the assets trading therein. In efficient markets, no one can earn returns that are more than commensurate with the level of risk. Efficient markets are characterized by low transaction costs and by the rapid rate at which new information is incorporated into prices.

2. (Arbitrage and the Law of One Price) Arbitrage is a type of investment transaction that seeks to profit when identical goods are priced differently. Buying an item at one price and immediately selling it at another is a type of arbitrage. Because of the combined activities of…show more content…

Gamblers simply accept risk without there being a concomitant reduction in someone else's risk.

8. (Misuses of Derivatives) Derivatives can be misused by speculating when one should be hedging, by not having acquired the requisite knowledge to use them properly by acting irresponsibly when using derivatives such as by being overly confident of one’s ability to forecast the direction of the market.

9. (The Role of Derivative Markets) The existence of derivative markets in the United States economy and indeed throughout most modern countries of the world undoubtedly leads to a much higher degree of market efficiency. Derivatives facilitate the activities of individual arbitrageurs so that unequal prices of identical goods are arbitraged until they are equal. Because of the large number of arbitrageurs, this is a quick and efficient process. Arbitrage on this large a scale makes markets less capable of being manipulated, less costly to trade in, and therefore more attractive to investors. (The opportunity to hedge also makes the markets more attractive to investors in managing risk.) This is not to say that an economy without derivative markets would be inefficient, but it would not have the advantage of this arbitrage on a large scale.

It is important to note that the derivative markets do not necessarily make the U.S. or world economy any larger or wealthier. The basic wealth, expected returns, and risks of the economy would be

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