GARP Digital Library


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GARP Member (Non-Affiliate):   US$8.50
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Quantitative Level:
Topics Covered:
Option insurance strategies, floors, caps, covered vs. naked writing, covered call, covered puts, synthetic forwards, put-call parity, option spreads, bull spread, vertical spread, bear spread, box spread, ratio spread, collar, collar width, zero-cost collar, straddle, strangle, written straddle, butterfly spread, asymmetric butterfly spread, convertible bond
Reading Abstract:
This chapter will be valuable to anyone interested in understanding how and why forwards, call options and put options are used to achieve a desired payoff, and in particular how the use of options can be viewed as buying and selling insurance. Specific option strategies such as spreads, straddles and collars are discussed. This chapter is easy to read, focused on the concepts of derivatives and their use without being demanding technically.
Reading Contents:
3.1 Basic insurance strategies
3.1.1 Insuring a long position: floors
3.1.2 Insuring a short position: caps
3.1.3 Selling insurance
3.2 Synthetic forwards
3.2.1 Put-call parity
3.3 Spreads and collars
3.3.1 Bull and bear spreads
3.3.2 Box spreads
3.3.3 Ratio spreads
3.3.4 Collars
3.4 Speculating on Volatility
3.4.1 Straddles
3.4.2 Butterfly spreads
3.4.3 Asymmetric butterfly spreads
3.5 Example: Another equity-linked note
Chapter Summary
Further Reading
Book Review:
*** From the Publisher ***

Derivatives tools and concepts permeate modern finance. An authoritative treatment from a recognized expert, Derivatives Markets presents the sometimes challenging world of futures, options, and other derivatives in an accessible, cohesive, and intuitive manner. Some features of the book include:

* Insights into pricing models. Formulas are motivated and explained intuitively. Links between the various derivative instruments are highlighted. Students learn how derivatives markets work, with an emphasis on the role of competitive market-makers in determining prices.
* A tiered approach to mathematics. Most of the book assumes only basic mathematics, such as solving two equations in two unknowns. The last quarter of the book uses calculus, and provides an introduction to the concepts and pricing techniques that are widely used in derivatives today.
* An applied emphasis. Chapters on corporate applications, financial engineering, and real options illustrate the broad applicability of the tools and models developed in the book. A rich array of examples bolsters the theory.
* A computation-friendly approach. The option pricing functions used in the text are available in accompanying Excel spreadsheets. Visual Basic code for the pricing functions is included, and can be modified for your own use.

GARP Digital Library