R. Stafford Johnson - Derivatives Markets and Analysis

1. Chapter 08

1. Chapter 01
2. Chapter 02
3. Chapter 03
4. Chapter 04
5. Chapter 05
6. Chapter 06
7. Chapter 07
8. Chapter 08
9. Chapter 09
10. Chapter 10
11. Chapter 11
12. Chapter 12
13. Chapter 13
14. Chapter 14
15. Chapter 15
16. Appendix A

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R. Stafford Johnson

Copyright 2017 by R. Stafford Johnson. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress CataloginginPublication Data is Available

ISBN 9781118202692 (Hardcover)
ISBN 9781118228289 (ePDF)
ISBN 9781118240724 (ePub)

Cover Design: C. Wallace
Cover Images: Abstract Background
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Chart Courtesy of R. Stafford Johnson

This book is dedicated to Nancy ShielsMy beacon

In 1973, the Chicago Board of Trade formed the Chicago Board Options Exchange (CBOE). The CBOE was the first organized option exchange for the trading of options. Just as the Chicago Board of Trade had served to increase the popularity of futures, the CBOE helped to increase the trading of options by making the contracts more marketable. Since the creation of the CBOE, organized stock exchanges in the United States, most of the organized futures exchanges, and many security exchanges outside the United States also began offering markets for the trading of options. As the number of exchanges offering options increased, so did the number of securities and instruments with options written on them. Today, option contracts exist not only on stocks but also on currencies, indexes, futures contracts, and debt and interest ratesensitive securities. There is also a large overthecounter option market in currency, debt, and interestsensitive securities and products in the United States and a growing overthecounter option market outside the United States. Just as impressive as the growth in options trading has been the growth in the futures market. Today, there are futures contracts on commodities, equity indexes, currencies, bonds, and interest rates, as well as such hybrid contracts as swaps. Options, futures, and swaps are derivativessecurities that derive their values from the underlying asset. Derivatives are used by institutional investors, portfolio managers, and corporations for speculation and hedging, as well as financial engineering in creating structured currency, equity, and debt positions.

Over the past 50 years, the investment industry has seen not only the proliferation of derivative securities and markets, but also academic contributions to the study of derivatives: The BlackScholes Option Pricing Model, index arbitrage, financial engineering, and dynamic portfolio insurance. The growth in the derivative markets and the academic contributions together point out the challenges in mastering an understanding and developing a knowledge of derivatives. The purpose of this text is to provide professionals and finance students with an exposition on derivatives that will take them from the basic concepts, strategies, and fundamentals to a more detailed understanding of the markets, advanced strategies, and models.

Derivative Markets and Analysis is the last in a threepart series on securities from Bloomberg Presss Financial Series. The first, Debt Markets and Analysis, covered fixedincome securities, and the second, Equity Markets and Analysis, focused on stock and stock portfolios. This book covers subjects presented in many derivative texts: futures and forward markets, the carryingcost model for pricing futures, option strategies, the BlackScholes and Binomial Option Pricing models, futures options, and swaps.

Today, many practitioners manage their securities and portfolios using a Bloomberg terminal. Bloomberg is a computer information and retrieval system providing access to financial and economic data, news, and analytics. Bloomberg terminals are common on most trading floors and are becoming more common in universities where they are used for research, teaching, and managing student investment funds. Given this widespread use of the Bloomberg system, the text also provides guides for using Bloomberg data and analytical functions for the topics covered in each chapter. There are also supplemental appendices with detailed descriptions of the Bloomberg system and a listing of many of the analytical functions that can be applied to investment analysis.