91 2, 95 6, 118,126 7put optionscollars 109 11concepts 2 3, 5 6, 8 12, 14,15 19, 22 3, 29, 37 9, 48, 50 3,107 9, 127
155delta values 48, 50 3, 63early exercise 14examples 5 6, 22 3, 29, 37 9,107 9gamma 63 5hedging 54 6interest rates 30 1long positions 8 12, 15 16, 54 5,127pre-paid forwards 123 5prices 22 3, 29, 37 9, 50 2repos (repurchase agreements) 140short positions 8 12, 15 16, 54straddles 111 12synthetics 39 40theta 66 9vega 69 71put spread, concepts 107 9put call parity 39 40concepts 16 19, 39 40PV see present valuequanto options 130 5ratings, banks 125repos (repurchase agreements)concepts 138 42definition 138 9examples 138 9forwards 140, 141 2options 140 2takeovers 139 40retail banks, ratings 125returns 119 20see also payoffsrhosee also interest ratesconcepts 31risksee also hedgingdiversification 119 20dividends 38 9long/short positions 8 9, 98pin risk 99vega 69, 94 6risk reversals see collarsrisk-free rates 56, 110 11, 133 6riskless portfolios 56 7, 63, 74 86,91 2
156Royal Dutch/Shell 3 6, 9 10, 13 14,34, 102Sanofi-Aventis 58securities lending 138 42‘selling the call spread’ 106share buy-backs 126 7short correlation, concepts 131 2, 136short positions, options 8 12, 15 16,54, 77 86, 94 6, 98 9, 106 7shorting, concepts 12, 54 7, 74 86,95 6, 99 100, 138skewsee also implied volatilityconcepts 101 4, 109definition 102reasons 102 3speculation 4 5, 85 6spreadscall spread 106 7concepts 96 7, 106 9gearing 96 7put spread 107 9standard deviation 27 9, 42 6,86 92, 144see also volatilitystates, options 9 12stock indices, underlying assets 2stockslending 138 42underlying assets 2 19straddles, concepts 111 15strangles, concepts 112 16strategies 45 6, 69, 91 2, 95 6,106 16, 117 27bearish strategies 107 8, 138 9bullish strategies 106 7, 109 11,130 1call spread 106 7collars 109 11, 121 2corporate investors 118, 119 27cross-holdings 119 20different option strategies 117 27employee incentive schemes 126gearing 96 7implied volatility 45 6, 69, 91 2,95 6insurance companies 122investor perceptions 118 19options 45 6, 69, 91 2, 94 100,105 16, 117 27
INDEXportfolio managers 118 27pre-paid forwards 123 5put spread 107 9quanto options 130 5share buy-backs 126 7straddles 111 12strangles 112 16strike priceBlack Scholes pricing formula 2,22 31, 35 6, 42 3, 133 5collars 109 11concepts 2 19, 22 31, 42 3, 51 2,96 7, 102 3, 107 8implied volatility 102 3put call parity 16 19skew 102 4straddles 111 12underlying assets 96 7supply/demand factors, prices 43synergies, takeovers 139synthetics, forwards 39 40takeoversforwards 141 2options 120 2, 141 2repos (repurchase agreements)139 40share prices 139, 141 2synergies 139Taylor expansion 89 91, 146Telefónica 141terminology, options 2 3, 8 12thetaconcepts 62, 65 9, 75 80definition 62, 65dynamic hedging 75 80, 86 92European options 66 9interest rates 66 9, 86 92losses 89 91time, theta 62, 65 9, 75 80, 86 92time to maturity 2, 22 31, 42 4,63 5, 133 5time value of an option (option part),concepts 49 52, 58 60, 88 92TomTom 112 15transaction costs 56uncertainty, volatility 104underlying assets
INDEXBlack Scholes pricing formula 2,22 31, 35 40, 42 5, 133 5concepts 2 19, 35 40, 48 60,94 8, 119 20, 138 40delta 48 60, 74 92, 94 6, 103, 142dividends 35 40, 57 60gamma 62 5, 75 86, 94 6, 98movements in price 81 6, 97 8,104prices 22 31, 35 40, 42 6, 48 60,62 5, 74 92, 94 8, 104, 139 42straddles 111 12strike prices 96 7types 2Unilever 5 7, 9 12, 24 6variance 144 7see also standard deviationvegasee also volatilitycall/put options 69 71concepts 29, 62, 69 71, 94 8gamma interaction 94 6risk measure 69, 94 6variations 71vision, option traders 91 2, 118,126 7
157volatilitysee also implied . . .Black Scholes pricing formula22 5, 28 9, 42 5, 133 5concepts 22 5, 28 9, 95 103, 118,126 7, 132 5definition 23 4, 42FX 132 5losses 25, 100low-volatility environments99 100option prices 24 5, 28 9, 46option traders 118, 126 7per annum 28 9, 45 6per trading day 28 9, 45 6profits 25, 46, 91 2, 95 6, 118,126 7uncertainty 104vega 29, 62, 69 71, 97 8Volkswagen 108writers, options 8 12zero cost collars 121 2
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