Derivative Pricing: A Problem-Based Primer, 1st Edition (Hardback) book cover

Derivative Pricing

A Problem-Based Primer, 1st Edition

By Ambrose Lo

Chapman and Hall/CRC

432 pages | 20 B/W Illus.

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Hardback: 9781138033351
pub: 2018-06-27
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Description

The proliferation of financial derivatives over the past decades, options in particular, has underscored the increasing importance of derivative pricing literacy among students, researchers, and practitioners. Derivative Pricing: A Problem-Based Primer demystifies the essential derivative pricing theory by adopting a mathematically rigorous yet widely accessible pedagogical approach that will appeal to a wide variety of audience. Abandoning the traditional "black-box" approach or theorists’ "pedantic" approach, this textbook provides readers with a solid understanding of the fundamental mechanism of derivative pricing methodologies and their underlying theory through a diversity of illustrative examples. The abundance of exercises and problems makes the book well-suited as a text for advanced undergraduates, beginning graduates as well as a reference for professionals and researchers who need a thorough understanding of not only "how," but also "why" derivative pricing works. It is especially ideal for students who need to prepare for the derivatives portion of the Society of Actuaries Investment and Financial Markets Exam.

 

Features

  • Lucid explanations of the theory and assumptions behind various derivative pricing models.
  • Emphasis on intuitions, mnemonics as well as common fallacies.
  • Interspersed with illustrative examples and end-of-chapter problems that aid a deep understanding of concepts in derivative pricing.
  • Mathematical derivations, while not eschewed, are made maximally accessible.
  • A solutions manual is available for qualified instructors.

The Author

Ambrose Lo is currently Assistant Professor of Actuarial Science at the Department of Statistics and Actuarial Science at the University of Iowa. He received his Ph.D. in Actuarial Science from the University of Hong Kong in 2014, with dependence structures, risk measures, and optimal reinsurance being his research interests. He is a Fellow of the Society of Actuaries (FSA) and a Chartered Enterprise Risk Analyst (CERA). His research papers have been published in top-tier actuarial journals, such as ASTIN Bulletin: The Journal of the International Actuarial Association, Insurance: Mathematics and Economics, and Scandinavian Actuarial Journal.

 

Table of Contents

List of Figures

List of Tables

Preface

Symbols

I Introductory Derivatives: Fundamental Concepts

1. An Introduction to Forwards and Options

Forwards

Options

Call Options

Put Options

Classification of Derivatives

Problems

2. Forwards and Futures

Alternative Ways to Buy a Stock

Prepaid Forwards on Stocks

Nondividend-paying Stocks

Dividend-paying Stocks

Forwards on Stocks

Forward Price

Cash-and-carry Arbitrage

Digression: Market Frictions

Futures

Differences between Futures and Forwards

Marking to Market

Problems

3.Option Strategies

Basic Insurance Strategies

Insuring a Long Position: Floors

Insuring a Short Position: Caps

Selling Insurance

A Simple but Useful Observation: Parallel Payoffs, Identical Profit

Put-call Parity

Synthetic Forwards

The Put-call Parity Equation

Spreads and Collars

Spreads

Collars

Volatility Speculation

Straddles

Strangles

Buttery Spreads

Problems

II Advanced Derivatives: Pricing and Hedging

4. Binomial Option Pricing Models

One-period Binomial Trees

Pricing by Replication

Risk-neutral Pricing

Constructing a Binomial Tree

Multi-period Binomial Trees

American Options

Options on Other Assets

Currency Options

Options on Futures

Epilogue: Pricing by True Probabilities

Problems

5. Mathematical Foundations of the BS Framework

A Lognormal Model of Stock Prices

Lognormal Probability Calculations

Estimating the Parameters of a Lognormal Stock Price Model

Problems

6. The Black-Scholes Formula

BS Formula for Stocks Paying Continuous Dividends

Applying the Black-Scholes Formula to Other Assets

Option Greeks

Option Delta

Option Gamma

Key Learning Items in Interpreting Option Greeks

Option Greeks of a Portfolio

Option Elasticity

Implied Volatility

Problems

7. Option Greeks and Risk Management

Delta-hedging and Holding Profits

Hedging Multiple Greeks

Delta-Gamma-Theta Approximation

Problems

8. Exotic Options

All-or-Nothing Options

Cash-or-nothing Options

Asset-or-nothing Options

Option Greeks of All-or-nothing Options

Gap Options

Introduction

Pricing and Hedging Gap Options

Exchange Options

Introduction

Pricing Exchange Options

Pricing Maximum and Minimum Options

Compound Options

Asian Options

Introduction

Pricing Asian Options

Lookback Options

Barrier Options

Other Exotic Options

Chooser Options

Forward Start Options

Problems

III Epilogue

9. General Properties of Option Prices

Put-Call Parity and Duality

Generalized Parity

Currency Put-call Duality

Upper and Lower Bounds on Option Prices

Comparing Options

Strike Price

Maturity

Early Exercise Decision for American Options

Proof : A Proof Based on No-arbitrage Bounds

Proof : A Cost-benefit Dissection Proof

Early Exercise Criterion for American puts

Problems

Appendix A Solutions to End-of-Chapter Problems

Bibliography

Index

About the Author

Ambrose Lo is currently Assistant Professor of Actuarial Science at the Department of Statistics and Actuarial Science at the University of Iowa. He received his Ph.D. in Actuarial Science from the University of Hong Kong in 2014, with dependence structures, risk measures, and optimal reinsurance being his research interests. He is a Fellow of the Society of Actuaries (FSA) and a Chartered Enterprise Risk Analyst (CERA). His research papers have been published in top-tier actuarial journals, such as ASTIN Bulletin: The Journal of the International Actuarial Association, Insurance: Mathematics and Economics, and Scandinavian Actuarial Journal.

About the Series

Chapman and Hall/CRC Financial Mathematics Series

Learn more…

Subject Categories

BISAC Subject Codes/Headings:
BUS027000
BUSINESS & ECONOMICS / Finance
MAT000000
MATHEMATICS / General
MAT029000
MATHEMATICS / Probability & Statistics / General