Risk Management, Derivatives Markets And Trading Strategies

The following sections are included:Chapter OutlineIntroductionIntroduction to Commodity Markets: The Case of OilOil futures marketsOil futures exchangesDelivery proceduresThe long-term oil marketPricing ModelsThe pricing of forward and futures oil contractsRelationship to physical marketTerm structure of pricesPricing swapsThe pricing of forward and futures commodity contracts: General principlesForward prices and futures prices: Some definitionsFutures contracts on commoditiesFutures contracts on a security with no incomeFutures contracts on a security with a known incomeFutures contracts on foreign currenciesFutures contracts on a security with a discrete incomeValuation of interest rate futures contractsThe pricing of future bond contractsTrading Motives: Hedging, Speculation, and ArbitrageHedging using futures marketsHedging: The case of cocoaHedging: The case of oilHedging: The case of petroleum products futures contractsThe use of futures contracts by petroleum products marketers, jobbers, consumers, and refinersSpeculation using futures marketsArbitrage and spreads in futures marketsThe Main Bounds on Option PricesBoundary conditions for call optionsBoundary conditions for put optionsSome relationships between call optionsSome relationships between put optionsOther propertiesSimple Trading Strategies for Options and their Underlying AssetsTrading the underlying assetsBuying and selling callsBuying and selling putsSome Option CombinationsThe straddleThe strangleOption SpreadsBull and bear spreads with call optionsBull and bear spreads with put optionsBox spreadDefinitions and examplesTrading a box spreadButterfly StrategiesButterfly spread with callsButterfly spread with putsCondor StrategiesCondor strategy with callsCondor strategy with putsRatio SpreadsSome Combinations of Options with Bonds and StocksCovered call: short a call and hold the underlying assetPortfolio insuranceMimicking portfolios and synthetic instrumentsMimicking the underlying assetSynthetic underlying asset: Long call plus a short put and bondsThe synthetic put: put-call parity relationshipConversions and ReversalsCase study: Selling Calls (Without Holding the Stocks/ as an Alternative to Short Selling Stocks/the Idea of Selling Calls is Also an Alternative to Buying Puts)Data and assumptionsSelling calls (without holding the stock)Comparing the strategy of selling calls (with a short portfolio of stocks): the extreme caseSelling calls (holding the stock)Leverage in selling call options (without holding the stocks)Selling Call options (without holding the stocks)Leverage in selling Call options (without holding the stocks): The extreme caseSelling calls using leverage (and holding the stock)Short sale of the stocks without optionsBuying Calls on EMABuying a call as an alternative to buying the stock: (also as an alternative to short sell put options)Data and assumptionsPattern of risk and returnCompare buying calls (as an alternative to portfolio of stocks)Risk return in optionsExample by changing volatility to 20%Data and assumptions:Compare buying calls (as an alternative to portfolio of stocks.)Leverage in buying call options (without selling the underlying)SummaryQuestionsCASE STUDY: COMPARISONS BETWEEN PUT AND CALL OPTIONSBuying Puts and Selling Puts NakedBuying putsSelling putsBuying and Selling CallsBuying callsSelling a callStrategy of Buying a Put and Hedge and Selling a Put and HedgeStrategy of selling put and hedge: sell delta units of the underlyingStrategy of buy put and hedge: buy delta units of the underlyingStrategy of Buy Call, Sell Put, and Buy Call, Sell Put and HedgeStrategy of Buy Call, Sell Put: Equivalent to Holding the UnderlyingStrategy of Buy Call, Sell Put and Hedge: Reduces Profits and Reduces LossesReferences