2Sticky delta rule, 337Sticky strike rule, 337Stochastic process, 216, 712Stochastic variable, 712Stochastic volatility models, 458-60Stock dividend, 712Stock’s expected return, 237—38stock option price and, 203Stock index, 52-54, 712Stock index futures, see Index futures.Stock index options, see Index options.Stock option, 152-55, 712. See also Black-Scholes model.commissions, 157-58dividend and stock split, 154-55executive, 163expiration dates, 152-53flex option, 154, 273long-term equity anticipation securities(LEAPS), 153, 273margins, 159~60naked, 159742
position and exercise limits, 155quotations, 155-57regulations of, 161specification of, 152-55strike prices, 153, 167-68taxation, 161--62terminology, 153-54trading, 157Stock option value,American options on dividend-paying stock,179, 254-56American options on non-dividend-payingstock, 247analytic approximation to American optionprices, 427assumptions, 170--71binomial tree, 200-210, 212-13binomial tree pricing formulas, 202—3, 207,212-13, 269-70,Black-Scholes model, 268-69bounds, for dividend-paying stocks, 178-79,267-68bounds, for non-dividend-paying stocks,171-74dividends, 154-55, 178—79, 186-87, 252-56dividend yield, 267~—70European options on a dividend-payingstock, 178-79, 252-53European options on a non-dividend-payingstock, 171-74, 246-48European options on a stock paying a knowndividend yield, 267-70factors affecting prices, 167—70implied distribution and lognormaldistribution, 334-35put-call parity, 174-75, 179, 186-87, 268,330-31risk-neutral valuation, 269single large jump in asset anticipated, 338-39stock’s expected return and, 203volatility smile (skew), 334-36Stock prices,expected return, 237-38lognormal property, 227-28, 234-36rate of return, distribution of, 236-37the process for, 222—25volatility, 238-41Stock split, 154-55, 712stock dividend and, 154—S5
Subject Index
stock options and, 155stock prices and, 154Stop-and-limit order, 33Stop—limit order, 33Stop-loss order, 33Stop-loss strategy, 300-302Stop order, 33Storage cost, 58, 712Straddle, 194-95, 712straddle purchase, 195straddle write, 195Strangle, 196, 712Strap, 195—96, 712Stratified sampling, variance reductionprocedure, 415-16Strengthening of the basis, 75Stress testing, 360, 689, 692, 712Strike price, 6, 712Stripped mortgage-backed securities, 587Strip, 195-96, 687, 712Sumitomo, 686, 687, 690Swap rate, 134-35, 527, 712bid, 135offer, 135Swap zero curve, 111, 136. See also LIBORzero curve.Swaps, 125, 712accrual, 603amortizing, 594basis, 595cancelable, 603—4cancelable compounding, 604~5commodity, 605comparative-advantage argument, 131—34,141-43compounding, 595-98confirmations, 130-31constant maturity swap (CMS), 599-600constant maturity Treasury swap (CMT),600-601correlation, 605covariance, 605credit risk and, 145—46currency, see Currency swaps.deferred, 521defined, 125differential (diff swap), 601equity, 601-2forward, 521Subject Index
743
 
index amortizing rate, 605indexed principal, 605interest rate, see Interest rate swaps. ~LIBOR-in-arrcars, 599step-up, 594variance, 605volatility, 605Swaptions, 520, 712Bermudan swaptions, 586European swaption valuation, 521-22,582-84forward risk-neutral valuation and Black’smodel, 523-24implied volatilities, 522—23relation to bond options, 521Swing option, energy market, 681, 712Sydney Futures Exchange (SFE), 19Synthetic option, 320, 712Systematic risk, 61, 62, 488, 713
TTailing the hedge, 82Take-and-pay option, energy market, 681, 713Tax, 35-36, 161-62Taxpayer Relief Act of 1997, 35, 162Tenor, 515Term repo, 94Term structure models, interest rates, 537, 713Term structure theories, shape of zero curve,102Terminal value, 713Theta, 309-11, 713estimating, using binomial tree, 398relationship with delta and gamma, 315-16Time decay, 309, 713Time-of-day order, 33Time-to-expiration effects, 168Time value, 154, 713Timing adjustment, 527-29, 713constant maturity swap (CMS), 600accrual swap, 603To-arrive contract, 1Tokyo International Financial FuturesExchange (TIFFE), 19Tokyo Stock Exchange, 52Top straddles, 195Top vertical combinations, 196Total return swap, 644—45, 713Tradeable derivatives, prices of, 244
Traders, types of, 10-14, 32-33Trading irregularities, 35Trading strategies, involving optionscombinations, 194-96for single option and stock, 185-87spreads, 187-94Tranches, 646Transaction cost, 309, 713Treasury bill, 104, 713Treasury bill futures, 713Treasury bond, 103—4, 713Treasury bond futures, 104-10, 713cheapest-to-deliver bond, 108conversion factors, 106—7quoted futures price, 109-10quotations, 105-6wild card play, 108-9Treasury bond futures option, 279, 282Treasury note, 713Treasury note futures, 21, 22, 713Treasury rate, 45, 93zero rate, 94, 95, 96-98Tree, 713Trinomial tree, 713for stock prices, 408-9,relation to finite difference method, 424—25Triple witching hour, 713
U
Underlying variable, 713Unsystematic risk, 61, 488, 713Up-and-in calls, 440, 713Up-and-in puts, 440, 713Up-and-out calls, 440, 713Up-and-out puts, 440, 713Uptick, 42, 713
U.S. Department of Energy, 679U.S. dollar index, 53
U.S. Treasury Department, 34
VvValue additivity, 618Value at risk (VaR), 346, 713conditional VaR (C-VaR), 347-48diversification and, 352historical simulation, 346, 348-50, comparedwith model building, 359-60linear model, 352-55744
Subject Index
 
model building approach, 346, 350—52,compared with historical simulation,359-60
Monte Carlo simulation, 359
principal components analysis, 360—63
quadratic modcl, 356-59
RiskMetrics and, 375
time horizon, 348
variance—covariance approach, 350—52
volatilities and, 350-52
Variance—covariance matrix approach, value atrisk, 350-52, 713Variance rate, 372, 713
estimating constant variance, maximum
likelihood methods, 378-79Variance reduction procedures, 414—18, 713
antithetic variable technique 414-15
control variate technique, 415
importance sampling, 415
moment matching, 416
quadratic resampling, 416
quasi-random sequences, 416-17
representative sampling through a tree,417-18
stratified sampling, 415-16
Variance swap, 605
Variance targeting, 380
Variation margin, 24, 713
Vega, 316-18, 713estimating, using binomial tree, 398interest rate derivatives, 531
Vega neutral portfolio, 318, 713
Volatility, stock prices, 713
Black-Scholes mode] and, 238-41, 330-31
causes of, 251-52
defined, 168, 211-12
estimating, 239-41, 372-74. See alsoEWMA, GARCH.
forecast future volatility, 382-85
implied, 250-51, 286. See also Volatilitysmile.
portfolio insurance and stock marketvolatility, 323
term structure, volatility of stock return,336-37, 384, 714
volatility skew, 334volatility surface, 336-37, 460Volatility, interest rate derivativesflat volatility, 518-19forward rate volatility, 579spot volatility, 518-19volatility skew, 585,Volatility matrix, 714. See also Volatilitysurface.Volatility skew, 334, 585, 713Volatility smile, 330, 714equity options, 334-36foreign currency options, 331-34Volatility surface, 336-37, 460. See alsoVolatility matrix.Volatility swap, 605, 714
Ww
Wall Street Journal, 27-30, 53, 57, 104, 105-6,155-57, 270-72, 276-77, 279-82
Warrant, 162-63, 249-50, 714
Wash sale rule, 161-62
Weakening of the basis, 75
Weather derivatives, 15, 679-80, 714
Weather Risk Management Association(WRMA), 679
Wiener process, 218-21, 714
Wild card play, 108-9, 714
Writing a covered call, 185
Writing an option, 8, 714
YYield, 714Yield curve, 714
Zz
Zero-cost collar, 435
Zero-coupon bond, 714
Zero-coupon interest rate, 714, See also Zerorate.
Zero-coupon yield curve, 714. See also Zerocurve.
Zero curve, 97—98
shape of zero curve, theories, 102Zero rate, 94, 96-98<|end|>