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1、Chapter 1IntroductionOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 20191What is a Derivative?A derivative is an instrument whose value depends on, or is derived from, the value of another asset.Examples: futures, forwards, swaps, options, exotics Options, Futures, and

2、Other Derivatives, 8th Edition, Copyright John C. Hull 20192Why Derivatives Are ImportantDerivatives play a key role in transferring risks in the economyThe underlying assets include stocks, currencies, interest rates, commodities, debt instruments, electricity, insurance payouts, the weather, etcMa

3、ny financial transactions have embedded derivativesThe real options approach to assessing capital investment decisions has become widely acceptedOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 20193How Derivatives Are TradedOn exchanges such as the Chicago Board Options

4、ExchangeIn the over-the-counter (OTC) market where traders working for banks, fund managers and corporate treasurers contact each other directlyOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 20194Size of OTC and Exchange-Traded Markets(Figure 1.1, Page 3)Options, Future

5、s, and Other Derivatives, 8th Edition, Copyright John C. Hull 20195Source: Bank for International Settlements. Chart shows total principal amounts for OTC market and value of underlying assets for exchange marketThe Lehman Bankruptcy (Business Snapshot 1.10)Lehmans filed for bankruptcy on September

6、15, 2019. This was the biggest bankruptcy in US historyLehman was an active participant in the OTC derivatives markets and got into financial difficulties because it took high risks and found it was unable to roll over its short term fundingIt had hundreds of thousands of transactions outstanding wi

7、th about 8,000 counterpartiesUnwinding these transactions has been challenging for both the Lehman liquidators and their counterparties Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 20196How Derivatives are UsedTo hedge risksTo speculate (take a view on the future dire

8、ction of the market)To lock in an arbitrage profitTo change the nature of a liabilityTo change the nature of an investment without incurring the costs of selling one portfolio and buying anotherOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 20197Foreign Exchange Quotes

9、for GBP, May 24, 2019 (See page 5)Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 20198BidOfferSpot1.44071.44111-month forward1.44081.44133-month forward1.44101.44156-month forward1.44161.4422Forward PriceThe forward price for a contract is the delivery price that would

10、be applicable to the contract if were negotiated today (i.e., it is the delivery price that would make the contract worth exactly zero)The forward price may be different for contracts of different maturities (as shown by the table)Options, Futures, and Other Derivatives, 8th Edition, Copyright John

11、C. Hull 20199TerminologyThe party that has agreed to buy has what is termed a long positionThe party that has agreed to sell has what is termed a short positionOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201910Example (page 5)On May 24, 2019 the treasurer of a corpor

12、ation enters into a long forward contract to buy 1 million in six months at an exchange rate of 1.4422This obligates the corporation to pay $1,442,200 for 1 million on November 24, 2019What are the possible outcomes?Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201911P

13、rofit from a Long Forward Position (K= delivery price=forward price at time contract is entered into)Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201912ProfitPrice of Underlying at Maturity, STKProfit from a Short Forward Position (K= delivery price=forward price at t

14、ime contract is entered into)Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201913ProfitPrice of Underlying at Maturity, STKFutures Contracts (page 7)Agreement to buy or sell an asset for a certain price at a certain timeSimilar to forward contractWhereas a forward cont

15、ract is traded OTC, a futures contract is traded on an exchangeOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201914Exchanges Trading FuturesCME Group (formerly Chicago Mercantile Exchange and Chicago Board of Trade)NYSE EuronextBM&F (Sao Paulo, Brazil)TIFFE (Tokyo)

16、and many more (see list at end of book)Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201915Examples of Futures ContractsAgreement to:Buy 100 oz. of gold US$1400/oz. in December Sell 62,500 1.4500 US$/ in MarchSell 1,000 bbl. of oil US$90/bbl. in AprilOptions, Futures,

17、and Other Derivatives, 8th Edition, Copyright John C. Hull 2019161. Gold: An Arbitrage Opportunity?Suppose that:The spot price of gold is US$1,400The 1-year forward price of gold is US$1,500The 1-year US$ interest rate is 5% per annumIs there an arbitrage opportunity? Options, Futures, and Other Der

18、ivatives, 8th Edition, Copyright John C. Hull 2019172. Gold: Another Arbitrage Opportunity?Suppose that:The spot price of gold is US$1,400The 1-year forward price of gold is US$1,400The 1-year US$ interest rate is 5% per annumIs there an arbitrage opportunity?Options, Futures, and Other Derivatives,

19、 8th Edition, Copyright John C. Hull 201918The Forward Price of Gold (ignores the gold lease rate) If the spot price of gold is S and the forward price for a contract deliverable in T years is F, then F = S (1+r )Twhere r is the 1-year (domestic currency) risk-free rate of interest.In our examples,

20、S = 1400, T = 1, and r =0.05 so thatF = 1400(1+0.05) = 1470Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 2019191. Oil: An Arbitrage Opportunity?Suppose that:The spot price of oil is US$95The quoted 1-year futures price of oil is US$125The 1-year US$ interest rate is 5%

21、 per annumThe storage costs of oil are 2% per annumIs there an arbitrage opportunity?Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 2019202. Oil: Another Arbitrage Opportunity?Suppose that:The spot price of oil is US$95The quoted 1-year futures price of oil is US$80The

22、1-year US$ interest rate is 5% per annumThe storage costs of oil are 2% per annumIs there an arbitrage opportunity?Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201921OptionsA call option is an option to buy a certain asset by a certain date for a certain price (the st

23、rike price)A put option is an option to sell a certain asset by a certain date for a certain price (the strike price)Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201922American vs European OptionsAn American option can be exercised at any time during its lifeA Europea

24、n option can be exercised only at maturity Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201923Google Call Option Prices (June 15, 2019; Stock Price is bid 497.07, offer 497.25); See Table 1.2 page 8; Source: CBOEOptions, Futures, and Other Derivatives, 8th Edition, Co

25、pyright John C. Hull 201924Strike PriceJul 2019 BidJul 2019 OfferSep 2019 BidSep 2019 OfferDec 2019 BidDec 2019Offer46043.3044.0051.9053.9063.4064.8048028.6029.0039.7040.4050.8052.3050017.0017.4028.3029.3040.6041.305209.009.3019.1019.9031.4032.005404.204.4012.7013.0023.1024.005601.752.107.408.4016.8

26、017.70Google Put Option Prices (June 15, 2019; Stock Price is bid 497.07, offer 497.25); See Table 1.3 page 9; Source: CBOEOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201925Strike PriceJul 2019 BidJul 2019 OfferSep 2019 BidSep 2019 OfferDec 2019 BidDec 2019Offer4606.

27、306.6015.7016.2026.0027.3048011.3011.7022.2022.7033.3035.0050019.5020.0030.9032.6042.2043.0052031.6033.9041.8043.6052.8054.5054046.3047.2054.9056.1064.9066.2056064.3066.7070.0071.3078.6080.00Options vs Futures/ForwardsA futures/forward contract gives the holder the obligation to buy or sell at a cer

28、tain priceAn option gives the holder the right to buy or sell at a certain priceOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201926Types of TradersHedgersSpeculatorsArbitrageursOptions, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201927Hedging

29、Examples (pages 10-12)A US company will pay 10 million for imports from Britain in 3 months and decides to hedge using a long position in a forward contractAn investor owns 1,000 Microsoft shares currently worth $28 per share. A two-month put with a strike price of $27.50 costs $1. The investor deci

30、des to hedge by buying 10 contracts Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201928Value of Microsoft Shares with and without Hedging (Fig 1.4, page 12)Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201929Speculation ExampleAn investo

31、r with $2,000 to invest feels that a stock price will increase over the next 2 months. The current stock price is $20 and the price of a 2-month call option with a strike of 22.50 is $1What are the alternative strategies? Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201930Arbitrage ExampleA stock price is quoted as 100 in London and $140 in New YorkThe current exchange rate is 1.4300What is the arbitrage opportunity?Options, Futures, and Other Derivatives, 8th Edition, Copyright John C. Hull 201931DangersTraders can switch from being hedgers