Readings and exercices

Very important: remember details, be able to do computations, read and re-read

Important: remember ideas and definitions
Not important: not at the exam

Remark: Business Snapshot are not topics found at the exams, but are nevertheless interesting to read!

Week 1
Chapter 1.
1.1 Futures Contracts ........................................................................................... Important
1.2 History of Futures Markets ......................................... Not important (but interesting!)
1.3 The Over-the-Counter Market ....................................................................... Important
1.4 Forward Contracts ......................................................................................... Important
1.5 Options........................................................................................................... Important
1.6 History of Options Markets ........................................ Not important (but interesting!)
1.7 Types of Traders ............................................................................................ Important
1.8 Hedgers .......................................................................................................... Important
1.9 Speculators..................................................................................................... Important
1.10 Arbitrageurs ................................................................................................... Important
1.11 Dangers .......................................................................................................... Important

Exercises :
• Hull, Chapter 1, problems 1.1 à 1.10
• The 10 multiple choice questions of Chapter 1 available on ZoneCours

Week 2
Chapter 2.
2.1 Opening and Closing Futures Positions ................................................ Very important
2.2 Specification of a Futures Contract................................................................ Important
2.3 Convergence of Futures Price to Spot Price .................................................. Important
2.4 The Operation of Margin Accounts
Daily Settlement ........................................................................... Very important
Further Details ....................................................................................... Important
The Clearing House and Clearing Margins..................................... Not important
Credit Risk ............................................................................................. important
2.5 OTC Markets ................................................................................................. Important
2.6 Market Quotes ............................................................................................... Important
2.7 Delivery ......................................................................................................... Important
2.8 Types of Traders and Types of Orders.................................................... Not important
2.9 Regulation ............................................................................................... Not important
2.10 Accounting and Tax ................................................................................ Not important
2.11 Forward vs Futures Contracts
Profits from forward and Futures contracts .................................. Very important
Foreign Exchange cotes .................................................................. Not important

Exercises :
• Hull, Chapter 2, Problems 2.1 à 2.3, 2.5 à 2.8, 2.10, 2.11, 2.19, 2.22
• The 10 multiple choice questions of Chapter 2 available on ZoneCours
• Supplementary exercises before the midterm : question #4

Page 1 sur 7
Week 3
Chapter 3.
3.1 Basic Principles .................................................................................... Very important
3.2 Arguments for and Against Hedging ............................................................. Important
3.3 Basis Risk ............................................................................................. Very important
3.4. Cross Hedging ...................................................................................... Very important
3.5 Stock Index Futures .............................................................................. Very important
3.6 Stack and Roll ................................................................................................ Important
Appendix ....................................................................................................... Important

Exercises :
• Hull, Chapter 3, Problems 3.1 à 3.7, 3.9, 3.13, 3.14, 3.18
• The 10 multiple choice questions of Chapter 3 available on ZoneCours
• Supplementary exercises before the midterm : question # 3, 8, 12

Week 4
Chapter 4.
4.1 Types of Rates ............................................................................................... Important
4.2 Swap rates ................................... Very important (à lire lors de la Week sur les swap)
4.3 The risk-free rate................................................................................... Very important
4.4 Measuring interest rates ........................................................................ Very important
4.5 Zero Rates ............................................................................................. Very important
4.6 Bond pricing ......................................................................................... Very important
4.7 Determining zero rates .......................................................................... Very important
4.8 Forward rates ........................................................................................ Very important
4.9 Forward rate agreements ....................................................................... Very important
4.10 Theories of the Term Structure of Interest Rates .................................... Not important

Exercises :
• Hull Chapter 4, Problems 4.1 à 4.6, 4.8 à 4.11, 4.13, 4.19, 4.20
• The 10 multiple choice questions of Chapter 4 available on ZoneCours

Page 2 sur 7
Week 5
Chapter 5.
5.1 Investment Assets vs. Consumption Assets ................................................... Important
5.2 Short Selling .................................................................................................. Important
5.3 Assumptions and Notation .................................................................... Very important
5.4 Forward Price for an Investment Asset ................................................. Very important
5.5 Known Income...................................................................................... Very important
5.6 Known Yield......................................................................................... Very important
5.7 Valuing Forward Contracts ................................................................... Very important
5.8 Are Forward Prices and Futures Prices Equal? .............................................. Important
5.9 Futures Prices of Stock Indices ............................................................ Very Important
5.10 Forward and Futures Contracts on Currencies ...................................... Very important
5.11 Futures on Commodities ................................................................................ Important
5.12 The Cost of Carry ................................................................................... Not important
5.13 Delivery Options ..................................................................................... Not important
5.14 Futures Prices and the Expected Spot Prices
Keynes and Hicks .......................................................................... Not important
Risk and returns ................................................................................... Important
The risk in a Futures Position ............................................................... Important
Normal backwardation and contango ............................................ Not important

Exercises :
• Hull, Chapter 5, Problems 5.1 à 5.7, 5.9 à 5.14
• The 10 multiple choice questions of Chapter 5 available on ZoneCours
• Supplementary exercises before the midterm : question # 1, 2, 6, 7, 10

Week 6
Chapter 6.
6.1 Day Count and Quotation Conventions ................................................ Very important
6.2 Treasury Bond Futures
Quotes .......................................................................................... Very important
Conversion factors ................................................................................ Important
Cheapest-to-Deliver Bond ........................................................... Very important
Determining the Futures Price ..................................................... Very important
6.3 Eurodollar Futures
Jusqu’à la sous section Forward vs Futures Interest Rates ........ Very important
Forward vs Futures Interest Rates .................................................. Not important
Convexity adjustment .................................................................... Not important
6.4 Duration ................................................................................................ Very important
6.5 Duration-Based Hedging Strategies Using Futures .............................. Very important

Exercises :
• Hull, Chapter 6, Problems 6.1 à 6.4, 6.6 à 6.14
• The 10 multiple choice questions of Chapter 6 available on ZoneCours
• Supplementary exercises before the midterm : question # 5, 9, 11

Page 3 sur 7
Week 7
Chapter 7. Swaps
7.1 Mechanics of Interest Rate Swaps ........................................................ Very important
7.2 Day Count Issues ........................................................................................... Important
7.3 Confirmations ............................................................................................... important
7.4 The Comparative-Advantage Argument ................................................. Not important
7.5 Valuation of interest rate swaps
Jusqu’à la sous section Bootstrapping LIBOR .............................. Very important
Bootstrapping LIBOR forward rates................................................ Not important
7.6 How the value changes through time ............................................................. Important
7.7 Fixed-for-fixed currency swaps .............................................................. Not important
7.8 Valuation of fixed-for-fixed currency swaps ......................................... Not important
7.9 Other currency swaps ............................................................................. Not important
7.10 Credit risk ............................................................................................... Not important
7.11 Credit Default swaps............................................................................... Not important
7.12 Other types of swaps..... .......................................................................... Not important

Exercises :
• Hull, Chapter 7, Problems 7.2, 7.4, 7.6, 7.8, 7.14, 7.16
• The 10 multiple choice questions of Chapter 7 available on ZoneCours
• Supplementary exercises after the midterm : question # 6

Week 8

Chapter 23. Credit derivatives

23.1 Credit Default Swaps ............................................................................ Very important
23.2 Valuation of Credit Default Swaps ....................................................... Very important
23.3 Total return swaps................................................................................... Not important
23.4 CDS forward and options ....................................................................... Not important
23.5 Credit Indices .......................................................................................... Not important
23.6 The use of fixed coupons ........................................................................ Not important
23.7 Collateralized debt obligations ............................................................... Not important
23.8 The Options Clearing Corporation.......................................................... Not important
9.9 Regulation ............................................................................................... Not important

Exercises :
• Hull, Chapter 23, Problems 23.2, 23.3, 23.6, 23.8, 23.9, 23.12, 23.14, 23.17, 23.19
• Multiple-choice questions from Chapter 23 available on ZoneCours
• Important:
For problems 23.8, 23.9 and 23.14, use the Excel example sheet available on
ZoneCours to facilitate your calculations .

Page 4 sur 7
Week 9
Chapter 9.
9.1 Types of Option .................................................................................... Very important
9.2 Option Positions.................................................................................... Very important
9.3 Underlying Assets .......................................................................................... Important
9.4 Specification of Stock Options ...................................................................... Important
9.5 Trading.................................................................................................... Not important
9.6 Commissions .......................................................................................... Not important
9.7 Margins Requirements ................................................................................... Important
9.8 The Options Clearing Corporation................................................................. Important
9.9 Regulation ............................................................................................... Not important
9.10 Taxation .................................................................................................. Not important
9.11 Warrants, Employee Stock Options, and Convertibles ........................... Not important
9.12 Over-the-Counter Options Markets ........................................................ Not important

Chapter 10.
10.1 Factors Affecting Option Prices............................................................ Very important
10.2 Assumptions and Notation ...................................................................... Not important
10.3 Upper and Lower Bounds for Option Prices ........................................... Not important
10.4 Put-Call Parity ...................................................................................... Very important
10.5 Calls on a Non-Dividend-Paying Stock .................................................. Not important
10.6 Puts on a Non-Dividend-Paying Stock ................................................... Not important
10.7 Effect of Dividends ................................................................................. Not important

Chapter 11.
11.1 Principal-Protected Notes ....................................................................... Not important
11.2 Strategies Involving a Single Option and a Stock ................................. Very important
11.3 Spreads
Bull spread ..................................................................................... Very important
Bear spread .................................................................................... Very important
Box spread .............................................................................................. Important
Butterfly spread ............................................................................. Very important
Calendar spread ............................................................................. Very important
Diagonal spread ............................................................................... Not important
11.4 Combinations
Straddle .......................................................................................... Very important
Strips and straps ...................................................................................... Important
Strangle ................................................................................................... Important
11.5 Other Payoffs ................................................................................................. Important

Exercises :
• Hull, chapter 9, problems 9.1 to 9.4, 9.6, 9.9, 9.10, 9.12 à 9.15
• Hull, chapter 10, problems 10.1, 10.7
• Hull, Chapter 11, problems 11.1 à 11.12
• The multiple-choice questions of Chapter 9 available on ZoneCours
• The multiple-choice questions of Chapter 10 available on ZoneCours
• The Multiple-choice questions from Chapter 11 available on ZoneCours
• Supplementary exercises after the midterm : question # 1a), 2a) et b), 3d) à g), 7a)

Page 5 sur 7
Week 10
Chapter 12.
12.1 A One-Step Binomial Model and a No-Arbitrage Argument ............... Very important
12.2 Risk-Neutral Valuation ......................................................................... Very important
12.3 Two-Step Binomial Trees ..................................................................... Very important
12.4 A Put Example ...................................................................................... Very important
12.5 American Options ................................................................................. Very important
12.6 Delta...................................................................................................... Very important
12.7 Determining u and d ............................................................................. Very important
12.8 Increasing the Number of Time Steps .................................................... Not important
12.9 Using DerivaGem ................................................................................... Not important
12.10 Options on Other Assets ......................................................................... Not important

Exercises :
• Hull, Chapter 12, Problems 12.1 à 12.13
• The 10 multiple choice questions of Chapter 12 available on ZoneCours
• Supplementary exercises after the midterm : question # 2c) à e), 3a) et b)

Week 11
Chapter 13.
13.1 Assumptions about How Stock Prices Evolve ...................................... Very important
13.2 Expected Return.................................................................................... Very important
13.3 Volatility ............................................................................................... Very important
13.4 Estimating Volatility from Historical Data ........................................... Very important
13.5 Assumptions Underlying Black-Scholes-Merton .......................................... Important
13.6 The Key No-Arbitrage Argument .................................................................. Important
13.7 The Black-Scholes-Merton Pricing Formulas....................................... Very important
13.8 Risk-Neutral Valuation ......................................................................... Very important
Application to Forward Contracts ................................................... Not important
13.9 Implied Volatilities ............................................................................... Very important
13.10 Dividends
European Options ................................................................................... Important
Example .................................................................................................. Important
American Call options ..................................................................... Not important
Black’s Approximation.................................................................... Not important

Exercises :
• Hull, Chapter 13, Problems 13.1, 13.2, 13.4 à 13.6, 13.8, 13.9, 13.13 à 13.15
• The 10 multiple choice questions of Chapter 13 available on ZoneCours
• Supplementary exercises after the midterm : question # 1b) et c), 5

Page 6 sur 7
Week 12
Chapter 17.
17.1 Illustration ...................................................................................................... Important
17.2 Naked and Covered Positions ........................................................................ Important
17.3 A Stop-Loss Strategy ..................................................................................... Important
17.4 Delta Hedging
Delta of European Stock Options ................................................. Very important
Dynamic Aspects of Delta hedging ............................................... Very important
Where the Cost Comes from.......................................................... Very important
Delta of a portfolio ....................................................................... Very important
Transaction costs .................................................................................... Important
17.5 Theta .............................................................................................................. Important
17.6 Gamma.................................................................................................. Very important
17.7 Relationship Between Delta, Theta and Gamma .................................... Not important
17.8 Vega ........................................................................................................ Not important
17.9 Rho ......................................................................................................... Not important
17.10 The realities of Hedging ......................................................................... Not important
17.11 Scenario analysis .................................................................................... Not important
17.12 Extension of Formulas ............................................................................ Not important
17.13 Creating Options Synthetically for Portfolio Insurance .......................... Not important
17.14 Stock Market Volatility .......................................................................... Not important

Exercises :
• Hull, Chapter 17, Problems 17.1 à 17.6, 17.10
• The 10 multiple choice questions of Chapter 17 available on ZoneCours
• Supplementary exercises after the midterm : question # 7

Page 7 sur 7