dollar Interest Rate The interest rate on aEurodollar deposit.
Eurocurrency A currency that is outside theformal control of the issuing country’smonetary authorities.
European Option An option that can beexercised only at the end of its life.
EWMA _ Exponentially weighted moving aver-age.Exchange Option An option to exchange one
asset for another.asset ior another.
Ex-dividend Date When a dividend is de-clared, an ex-dividend date is specified.Investors who own shares of the stock upto, the ex-dividend date receive the dividend.
Executive Stock Option A stock option issuedby company on its own stock and given to itsexecutives as part of their remuneration.
705
Exercise Limit Maximum number of optioncontacts that can be exercised within a five-day period.
Exercise Price The price at which the under-lying asset may be bought or sold in an
option contract. (Also called the strike
option contrac AISO Called the strike
hat forwardinterest rates equal expected future spotinterest rates.
Expected Value of a Variable The averagevalue of the variable obtained by weightingthe alternative values by their probabilities.
Expiration Date The end of life of a contract.
Exposure The maximum loss from default bya counterparty.
Explicit Finite Difference Method A methodfor valuing a derivative by solving theunderlying differential equation. The valueof the derivative at time t is related to threevalues at time t+ ét. It is essentially thesame as the trinomial tree method.
Exponentially Weighted Moving Average ModelA model where exponential weighting isused to provide forecasts for a variable fromhistorical data. It is sometimes applied tothe variance rate in value-at-risk calcula-tions.
Exponential Weighting A weighting schemewhere the weight given to an observationdepends on how recent it is. The weightgiven to an observation ¢ time periods agois A times the weight given to an observationt— 1 time periods ago where 4 < 1.
Extendable Bond A hond whose life can heextended at the option of the holder
Extendable Swap A swap whose life can be
extended at the option of one side to the
contract.Factor Source of uncertainty.
Factor analysis An analysis aimed at finding asmall number of factors that describe most
 706
of the variation in a large number ofcorrelaied variables. (Similar to a principalcomponents analysis.)
FASB TinancialBoard.
Financial Intermediary A bank or other fi-nancial institution that facilitates the flowof funds between different entities in theeconomy.
Finite Difference Method A method for sol-ving a differential equation.
Accounting Standards
Flat Volatility The name given to volatilityused to price a cap when the same volatilityis used for each caplet.
Flex Option An option traded on an ex-change with terms that are different fromthe standard options traded by the ex-change.
Floor See Interest rate floor.Floor—Ceiling Agreement See Collar.Floorlet
Floor Rate The rate in an interest rate flooragreement.
One component of a floor.
Foreign Currency Option An option on aforeign exchange rate.
Forward Contract A contract that obligatesthe holder to buy or sell an asset for apredetermined delivery price at a predeter-mined future time.
Forward Exchange Rate The forward price ofone unit of a foreign currency.
Forward Interest Rate The interest rate for afuture period of time implied by the ratesprevailing in the market today.
Forward Price The delivery price in a forwardcontract that causes the contract to be worthzero.
Forward Ratetime in the future implied by today’s zerorates.
Forward Rate Agreement (FRA) Agreementthat a certain interest rate will apply to a
Rate of interest for a period of
Glossary of Terms
certain principal amount for a certain timeperiod in the future.
Forward Risk-Neutral World A world is for-ward risk-neutral with respect to a certainasset when the market price of risk equalsthe volatility of that asset.
Forward Start Option An option designed sothat it will be at-the-money at some time inthe future.
Forward Swap See Deferred swap.
Futures Contract A contract that obligates theholder to buy or sell an asset at a predeter-mined delivery price during a specified fu-ture time period. The contract is marked tomarket daily.
Futures Option An option on a futures con-tract.
Futures Price The delivery price currentlyapplicable to a futures contract.
Gamma The rate of change of delta withrespect to the asset price.
Gamma-Neutral Portfolio A portfolio with agamma of zero.
GARCH Model A model for forecasting vo-latility where the variance rate follows amean-reverting process.
Generalized Wiener Process A. stochasticprocess where the change in a variable ineach short tnormal distribution with mean and var-iance, both proportional to ét.
 
e period of length 4 has ane period of leng’ sa
Geometric Average The nth root of the pro-duct of numbers.
Geometric Brownian Motion A_ stochasticprocess often assumed for asset prices wherethe logarithm of the underlying variablefollows a generalized Wiener process.
Greeks Hedge parameters such as delta,gamma, vega, theta, and rho.
Hazard Rate Measures probability of defaultin a short period of time conditional on noearlier default.Glossary of Terms
HDD Heating degree days. The maximum ofzero and the amount by which the dailyaverage temperature is less than 65° Fahren-heit. The average temperature is the averageof the highest and lowest temperatures (mid-night to midnight).
Hedge A trade designed to reduce risk.
Hedger An individual who enters into hed-ging trades.
Hedge Ratio The ratio of the size of a posi-tion in a hedging instrument to the size ofthe position being hedged.
Historical Simulation A simulation based onhistorical data.
Uisteric Valatilit: Ay:aaisterit Vouatnity “4
historical data.
Heliday Calendar Calend
Heliday Calendar Calenda ining whichdays are holidays for the purposes of deter-mining payment dates in a swap.
Implied Distribution A distribution for a fu-ture asset price implied from option prices.
a
Implied Repo Rate The repo rate impliedfrom the price of a Treasury bill and aTreasury bill futures price.
Implied Tree A tree describing the move-ments of an asset price that is constructedto be consistent with observed option prices.
Implicit Finite Difference Method A methodfor valuing a derivative by solving theunderlying dierential equation. The valueof the derivative at time t+ 6r is related tothree values at time t.
Implied Volatility Volatility implied from anoption price using the Black-Scholes or asimilar model.
Implied Volatility Function (VF) Model Mo-del designed so that it matches the marketprices of all European options.
Inception Profit Profit created by selling aderivative for more than its theoretical va-lue.
Index Amortizing Swap See Indexed principalswap.
707
Index Arbitrage An arbitrage involving aposition in the stocks comprising a stockindex and a position in a futures contract onthe stock index.
Indexed Principal Swap A swap where theprincipal declines over time. The reductionin the principal on a payment date dependson the level of interest rates.
Index Futures A futures contract on a stockindex or other index.
Index Option An option contract on a stockindex or other index.
Initial Margin The cash required from afutures trader at the time of the trade.
Veet tae Barard Bate Toy
MStantancuUs FUIrWalu Nae .
a very short period of time in the future.
Yotaract Rate Can An ontion that arovides a
AMUEIESt Naw Cap “AN OpUON Ulat Proviues apayoff when a specified interest rate is abovea certain level. The interest rate is a floating
rate that is reset periodically.
Interest Rate Collar A combination of aninterest rate cap and an interest rate floor.
Interest Rate Derivative A derivative whosepayoffs are dependent on future interestrates.
Interest Rate Floor An option that provides apayoff when an interest rate is below acertain level. The interest rate is a floatingrate that is reset periodically.
Interest Rate Option An option where thepayoff is dependent on the level of interestrates,
{nterest Rate Swap An exchange of a fixedrate of interest on a certain notional princi-pal for a floating rate of interest on the samenotional principal.
In-the-Money Option Either (a) a call optionwhere the asset price is greater than thestrike price or (b) a put option where theasset price is less than the strike price.
Intrinsic Value For a call option, this is the
greater of the excess of the asset price overthe strike price and zero. For a put option, it708
Glossary of Terms
 
is the greater of the excess of the strike priceover the asset price and zero.
Inverted Market A market where futuresprices decrease with maturity.
Investment Asset An asset held by at leastsome individuals for investment purposes.
10 Interest Only. A mortgage-backed secur-ity where the holder receives only interestcash flows on the underlying mortgage pool.
{to’s Lemma A result that enables the sto-chastic process for a function of a variableto be calculated from the stochastic processfor the variable itself.
Ité Process A stochastic process where thechange in a variable during each shortperiod of time of length ét has a normaldistribution. The mean and variance of thedistribution are proportional to éf and arenot necessarily constant.
Kappa See Vega.
Kurtosis A measure of the fatness of the tailsof a distribution.
Jump Diffusion Model Model where assetprice has jumps superimposed on to adiffusion process such as geometric Brow-nian motion.
Lambda See Vega.
LEAPS Long-term equity anticipation secu-rities. These are relatively long-term optionson individual stocks or stock indices.
LIBID London interbank bid rate. The ratebid by banks on Eurocurrency deposits (i.e.,the rate at which a bank is willing to borrowfrom other banks).
LIBOR London interbank offer rate. Therate offered by banks on Eurocurrency de-posits (i.e., the rate at which a bank iswilling to lend to other banks).
LIBOR Curve LIBOR zero-coupon interestrates as a function of maturity.
LIBOR-in-Arrears Swap Swap where the in-terest paid on a date is determined by theinterest rate observed on that date (not by
the interest rate observed on the previouspayment date).
Limit Moye The maximum price move per-mitted by the exchange in a single tradingsession.
Limit Order An order that can be executedonly at a specified price or one more favor-able to the investor.
Liquidity Preference Theory A theory leadingto the conclusion that forward interest ratesare above expected future spot interest rates.
Liquidity Premium The amount that forwardinterest rates exceed expected future spotinterest rates.
Liqnidity Risk Risk that it will not be possi-ble to sell a holding of a particular instru-ment at its theoretical price.
Locals Individuals on the floor of an ex-change who trade for their own accountrather than for someone else.
Lognormal distribution A variable has a log-nofmal distribution when the logarithm ofthe variable has a normal distribution.
Long hedge A hedge involving a long futuresposition.
Long position A position involving the pur-chase of an asset.
Lookback Option An option whose payoff isdependent on the maximum or minimum ofthe asset price achieved during a certainperiod.
Low Discrepancy Sequencesequence.
See Quasi-random
Maintenance Margin When the balance in atrader’s margin account falls below themaintenance margin level, the traderreceives a margin call requiring the ac-count to be topped up to the initialmargin level.
Margin The cash balance (or security de-posit) required from a futures or optionstrader.Glossary of Terms
709
 
Margin Call A request for extra margin whenthe balance in the margin account fallsbelow the maintenance margin level.
Market Maker A trader who is willing toquote both bid and offer prices for an asset.
Market Modei A model most commoniyused by traders.
Market Price of Risk A measure of the trade-offs investors make between risk and return.
Market Segmentation Theory A theory that
short interest rates are determined indepen-dently of long interest rates by the market.
Marking to Market The practice of revaluingan instrument to reflect the current values ofthe relevant market variables.
Markoy Process A stochastic process wherethe behavior of the variable over a shortperiod of time depends solely on the valueof the variable at the beginning of theperiod, not on its past history.
Martingale A zero-drift stochastic process.
Maturity Date The end of the life of a con-tract.
Maximum Likelihood Method A method forchoosing the values of parameters by max-imizing the probability of a set of observa-tions occurring.
Mean Reyersion The tendency of a marketvariable (such as an interest rate) to revertback to some long-run average level.
Measure Sometimes also called a probabilitymeasure, it defines the market price of risk.
Modified Duration A modification to thestandard duration measure so that it moreaccurately describes the relationship betweenproportional changes in a bond price andabsolute changes in its yield. The modifica-tion takes account of the compoundingfrequency with which the yield is quoted.
Money Market Account An investment that isinitially equal to $1 and, at time r, increasesat the very short-term risk-free interest rateprevailing at that time.
Monte Carlo Simulation A procedure forrandomly sampling changes in market vari-ables in order to value a derivative.
Mortgage-Backed Security A security thatentitles the owner to a share in the cash
flows realized from a pool of mortgages.
Naked Position A short position in a calloption that is not combined with a long
tne not combined song
position in the underlying asset.
Netting The ability to offset contracts withpositive and negative values in the event of adefault by a counterparty
Newton—Raphson Method An iterative proce-dure for solving nonlinear equations.
No-arbitrage Assumption The assumptionthat there are no arbitrage opportunities inmarket prices.
No-arbitrage Interest Rate Model A modelfor the behavior of interest rates that isexactly consistent with the initial term struc-ture of interest rates.
Nonstationary model A model where the vo-latility parameters are a function of time.
Nonsystematic risk Risk that can be diversi-fied away.
Normal Backwardation A situation where thefutures price is below the expected futurespot price.
Normal Distribution The standard _bell-shaped distribution of statistics.
Normal Market A market where futuresprices increase with maturity.
Notional Principal The principal used to cal-culate payments in an interest rate swap. Theprincipal is “‘notional’ because it is neitherpaid nor received.
Numeraire Defines the units in which securityprices are measured. For example, if theprice of IBM is the numeraire, all securityprices are measured relative to IBM. If IBMis $80 and a particular security price is $50,the security price is 0.625 when IBM is thenumeraire.710
Numerical Procedure A method of valuing anoption when no formula is available.
OCC Options Clearing Corporation. SeeClearinghouse.
Offer Price The price that a dealer is offeringto sell an asset.
Open Interest The total number of long posi-tions outstanding in a futures contract(equals the total number of short positions).
Open Outery System of trading where tradersmeet on the floor of the exchange
Option The right to buy or sell an asset.
Option-Adjusted Spread The spread over theTreasury curve that makes the theoreticalprice of an interest rate derivative equal tothe market price.
Option Class All options of the same type(call or put) on a particular stock.
Option Series Al} options of a certain classwith the same strike price and expirationdate.
Order Book Official See Board broker.
Out-of-the-Money Option Either (a) a calloption where the asset price is less thanthe strike price or (b) a put option wherethe asset price is greater than the strikeprice.
Over-the-Counter Market A market wheretraders deal by phone. The traders areusually financial institutions, corporations,and fund managers.
Package A derivative that is a portfolio ofstandard calls and puts, possibly combinedwith a position in forward contracts and theasset itself.
Parallel Shift A movement in the yield curvewhere each point on the curve changes bythe same amount.
Par Value The principal amount of a bond.
Par Yield The coupon on a bond that makesits price equal the principal.
Glossary of Terms
Path-Dependent Option An option whosepayoff depends on the whole path followedby the underlying variable—not just its finalvalue.
Payoff The cash realized by the holder of anoption or other derivative at the end of itslife.
Plain Vanilla A term used to describe astandard deal.
PO Principal Only. A mortgage-backed se-curity where the holder receives only princi-pal cash flows on the underlying mortgagepool.
Poisson Process A process describing a situa-tion where events happen at random. Theprobability of an event in time ét is Adt,where A is the intensity of the process.
Portfolio Immunization Making a portfoliorelatively insensitive to interest rates.
Portfolio Insurance Entering into trades toensure that the value of a portfolio will notfall below a certain level.
Position Limit The maximum position a tra-der (or group of. traders acting together) isallowed to hold.
Preminm The price of an option.
Prepayment Function A function estimatingthe prepayment of principal on a portfolioof mortgages in terms of other variables.
Principal The par or face value of a debtinstrument.
Principal Components Analysis An analysisaimed at finding a smali number of factorsthat describe most of the variation in a largenumber of correlated variables. (Similar to afactor analysis.)
Program Trading A procedure where tradesare automatically generated by a computerand transmitted to the trading floor of anexchange.
Protective Put A put option combined with along position in the underlying asset.Glossary of Terms
Pull-to-Par The reversion of a bond’s price toits par value at maturity.
Put-Call Parity The relationship between theprice of a European call option and theprice of a European put option when theyhave the same strike price and maturitydate.
Put Option An option to sell an asset for acertain price by a certain date.
Puttable Bond A bond where the holder hasthe right to sell it back to the issuer atcertain predetermined times for a predeter-mined price.
Puttable Swap A swap where one side has theright to terminate early.
a*2>
whara tha wausf isderivative where the payor is
Adefined by variables associated with onecurrency but is paid in another currency.
Quasi-Random Sequence A sequence of num-bers used in a Monte Carlo simulation thatare representative of alternative outcomesrather than random.
Rainbow Option An option whose payoff isdependent on two or more underlying vari-ables.
Range-Forward Contract The combination ofa long call and short put or the combinationof a short call and long put.
Real Option Option involving real (as op-posed to financial) assets. Real assets in-clude land, plant, and machinery.
Rebalancing The process of adjusting a trad-ing position periodically. Usually the pur-pose is to maintain delta neutrality.
Recovery Rate Amount recovered in the eventof a default as a percent of the claim.
Repo Repurchase agreement. A procedurefor borrowing money by selling securitiesto a counterparty and agreeing to buy themback later at a slightly higher price.
Repo Rate The rate of interest in a repotransaction.
711
Reset Date The date in a swap or cap or floorwhen the floating rate for the next period isset.
Reversion Level The level to which the valueof a market variable (e.g., an interest rate)tends to revert.
Rho Rate of change of the price of a deriva-tive with the interest rate.
Rights Issue An issue to existing shareholdersof a security giving them the right to buynew shares at a certain price.
Risk-Free Rate The rate of interest that canbe earned without assuming any risks.
Risk-Neutral Valuation The valuation of anoption or other derivative assuming theworld is risk neutral. Risk-neutral valuationgives the correct price for a derivative in allworlds, not just in a risk-neutral world.
Risk-Neutral World A world where investors
are assumed to require no extra return onaverage for bearing risks.
Roll Back See Backwards induction.
Scalper A trader who holds positions for avery short period of time.
Scenario Analysis An analysis of the effects
of possible alternative future movements inmarket variables on the value of a portfolio.
SEC Securities and Exchange Commission,
Settlement Price The average of the pricesthat a futures contract trades for immedi-ately before the bell signaling the close oftrading for a day. It is used in mark-to-market calculations.
Short Hedge A hedge where a short futuresposition is taken.
Short Position A position assumed whentraders sell shares they do not own.
Short Rate The interest rate applying for avery short period of time.
Short Selling Selling in the market shares thathave been borrowed from another investor.
Short-Term Risk-Free Rate See Short rate.712
Shout Option An option where the holderhas the right to lock in a minimum valuefor the payoff at one time during its life.
Sigma See Vega.
Simulation See Monte Carlo simulation.
Specialist An individual responsible formanaging limit orders on some exchanges.The specialist does not make the informa-tion on outstanding limit orders available toother traders.
Speculator An individual who is taking aposition in the market. Usually the indivi-dual is betting that the price of an asset willgo up or that the price of an asset will godown.
Spot Interest Rate See Zero-coupon interestrate.
Spot Price The price for immediate delivery.
Spot Volatilities The volatilities used to pricea cap when a different volatility is used foreach caplet.
Spread Option An option where the payoff isdependent on the difference between twomarket variables.
Spread Transaction A position in two ormore options of the same type.
Static Hedge A hedge that does not have tobe changed once it is initiated.
Static Options Replication A procedure forhedging a portfolio that involves findinganother portfolio of approximately equalvalue on some boundary.
Step-up Swap A swap where the principalincreases over time in a predetermined way.
Stochastic Process An equation describingthe probabilistic behavior of a stochasticvariable.
Stochastic Variable A variable whose futurevalue is uncertain.
Stock Dividend A dividend paid in the formof additional shares.
Glossary of Terms
Stock Index An index monitoring the valueof a portfolio of stocks.
Stock Index Futures Futures on a stock in-
dex.Stock Index Option An option on a stock in-
Aes
Uca.Stock Option Option on a stock.
Stock Split The conversion of each existingshare into more than one new share.
Storage Costs The costs of storing a com-modity.
Straddle A long position in a call and a paywith the same strike price.
Strangle A long position in a call and a putwith different strike prices.
Strap A long position in two call options andone put option with the same strike price.
Stress Testing Testing of the impact of ex-treme market moves on the value of aportfolio.
Strike Price The price at which the asset maybe bought or sold in an option contract.(Also called the exercise price.)
Strip A long position in one call option andtwo put options with the same strike price.
Swap An agreement to exchange cash flowsin the future according to a prearrangedformula.
Swap Rate The fixed rate in an interest rateswap that causes the swap to have a value ofzero.
Swaption An option to enter into an interest
rate Swap where a specified fixed late isexchanged for floating.
Swing Option Energy option in which therate of consumption must be between aminimum and maximum level. There isusually a limit on the number of times theoption holder can change the rate at whichthe energy is consumed.
Synthetic Option An option created by trad-ing the underlying asset.Glossary of Terms
713
 
Systematic Risk Risk that cannot be diversi-fied away.
Take-and-Pay Option See Swing option.
Term Stracture of Interest Rates The relation-ship between interest rates and their matu-rities.
Terminal Value The value at maturity.
Theta The rate of change of the price of anoption or other derivative with the passageof time.
Time Decay See Theta.
Time Value The value of an option arisingfrom the time left to maturity (equals anoption’s price minus its intrinsic value).
Timing Adjustment Adjustment made to theforward value of a variable to allow for thetiming of a payoff from a derivative.
Total Return Swap A swap where the returnon an asset such as a bond is exchanged forLIBOR plus a spread. The return on theasset includes income such as coupons andthe change in value of the asset.
Transactions Costs The cost of carrying out atrade (commissions plus the difference be-tween the price obtained and the midpointof the bid—offer spread).
Treasury Bill A short-term non-coupon-bear-ing instrument issued by the government tofinance its debt.
Treasury Bill Futures A futures contract on aTreasury bill.
Treasury Bond A long-term coupon-bearing
instrument issued by the government tofinance it debt.
Treasury Bond Futures A futures contract onTreasury bonds.
Treasury Note See Treasury bond. (Treasurynotes have maturities of less than 10 years.)
Treasury Note Futures A futures contract on
Treasury notes.
Tree A representation of the evolution of thevalue of a market variable for the purposesof valuing an option or other derivative.
Trinomial Tree A tree where there are threebranches emanating from each node. It isused in the same way as a binomial tree forvaluing derivatives.
Triple Witching Hour A term given to thetime when stock index futures, stock indexoptions, and options on stock index futuresall expire together.
Underlying Variable A variable that price ofan option or other derivative depends on.
Unsystematic risk See Nonsystematic risk.
Up-and-In Option An option that comes intoexistence when the price of the underlyingasset increases to a prespecified level.
Up-and-Out Option An option that ceases toexist when the price of the underlying assetincreases to a prespecified level.
Uptick An increase in price.
Value at Risk A loss that will not be exceededat some specified confidence level.
Variance—covariance matrix A matrix show-ing variances of, and covariances between, anumber of different market variables.
Variance Rate The square of volatility.
Variance Reduction Procedures Proceduresfor reducing the error in a Monte Carlosimulation.
Variation Margin An extra margin requiredto bring the balance in a margin account upto the initial margin when there is a margincall.
Vega The rate of change in the price of anoption or other derivative with volatility.
Vega-neutral portfoliovega of zero.
A portfolio with a
Volatility A measure of the uncertainty of thereturn realized on an asset.
Volatility Skew A term used to describe thevolatility smile when it is nonsymmetrical.714
Volatility Smile The variation of impliedvolatility with strike price.
Volatility Swap Swap where the realizedvolatility during an accrual period is ex-changed for a fixed volatility. Both percen-tage volatilities are applied to a notionalprincipal.
Volatility Term Structure The variation ofimplied volatility with time to maturity.
Volatility Matrix A table showing the varia-tion of implied volatilities with strike priceand time to maturity.
Warrant An option issued by a company orafinancial institution. Call warrants are fre-quently issued by companies on their ownstock.
Weather Derivatives Derivative where thepayoif depends on the weather.
Wiener Process A stochastic process wherethe change in a variable during each short
Glossary of Terms
period of time of length st has a normaldistribution with a mean equal to zero andavariance equal to dt.
Wild Card Play The right to deliver on afutures contract at the closing price for aperiod of time after the close of trading.
Writing an Option Selling an option.Yield A return provided by an instrument.Yield Curye See Term structure.
Zero-Coupon Bond A bond that provides nocoupons.
Zero-Coupon Interest Rate The interest ratethat would be earned on a bond thatprovides no coupons.
Zero-Coupon Yield Curve A plot of the zero-coupon interest rate against time to matur-ity.
Zero Curve See Zero-coupon yield curve.
Zero Rate See Zero-coupon interest rate.DERIVAGEM SOFTWARE
 
The software accompanying this text is DerivaGem for Excel, Version 1.50. It requires ExcelVersion 7.0 or later. The software consists of three files: dg150.dll, Drea en Bottitions.xls To install the software you should create a directory with the ni ‘ivGem (or someother name of your own choosing) and load DG150.xls and DG1I50functions.xls into the directory.You should load dg150.dll into the Windows\System directory (Windows 95 and 98 users) or theWINNT System 32 directory (Windows 2000 and Windows NT users).!
Excel 2000 users should ensure that Security for Macros is set at Medium or Low. Check Toolsfollowed by Macros in Excel to change this. While using the software you may be asked whetheryou want to enable macros. You should click Enable Macros.
Updates to the software can be downloaded from the author’s website:
www.rotman.utoronto.ca/“ hull
There are two parts to the software: the Options Calculator (DG150.xls) and the ApplicationsBuilder (DG150functions.xls). Both parts require dg15S0.dll to be loaded into the Windows\System
WUTRINITA SOc star ate
- Ge? GHeertary Me cere are advised ta Path the Aiotian CaleuteOL WIININ ET \OYStCINO2 GIICCLOLy. INCW USEIS are aUviseud lO Slarl Wit WIe UpiUuon Udlculdlor,
THE OPTIONS CALCULATOR
 
 
DG150.xls is a user-friendly options calculator. It consists of three worksheets. The first worksheetis used to carry out computations for stock options, currency options, index options, and futuresoptions; the second is used for European and American bond options; and the third is used forcaps, floors, and European swap options.
The software produces prices, Greek letters, and implied volatilities for a wide range of differentinstruments. It displays charts showing the way that option prices and the Greek letters depend oninputs. It also displays binomial and trinomial trees showing how the computations are carried out.
' Note that it is not uncommon for Windows Explorer to be set up so that *dil files are not displayed. To change thesetting so that the *.dll file can be seen proceed as follows. In Windows 95, click View, followed by Options, followedby Show All Files. In Windows 98 click View}, followed by Folder Options, followed by View, followed by Show AllFiles. In Windows 2000, click Tools, followed by Folder Options, followed by View, followed by Show Hidden Files andFolders.
2 Version 1.51, which corrects a bug in the display of the binomial tree for dividend-paying stocks, is alreadyavailable and should be downloaded.
715716 DerivaGem
General Operation
To use the options calculator, you should choose a worksheet and click on the appropriate buttonsto select Option Type, Underlying Type, and so on. You should then enter the parameters for theoption you are considering, hit Enter on your keyboard, and click on Calculate. DerivaGem willthen display the price or implied volatility for the option you are considering together with Greekletters. If the price has been calculated from a tree, and you are using the first or second worksheet,you can then click on Display Tree to see the tree. Sample displays of the tree are shown in Figures18.3,