Financial derivatives

World Map Financial DerivativesFinancial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right. Transactions in financial derivatives should be treated as separate transactions rather than as integral parts of the value of underlying transactions to which they may be linked. The value of a financial derivative derives from the price of an underlying item, such as an asset or index. Unlike debt instruments, no principal amount is advanced to be repaid and no investment income accrues....
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Financial derivatives F inancialderivatives John Wiley & SonsFounded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With offices in North America, Europe, Aus-tralia and Asia, Wiley is globally committed to developing and marketingprint and electronic products and services for our customers’ professionaland personal knowledge and understanding. The Wiley Finance series contains books written specifically for financeand investment professionals as well as sophisticated individual investorsand their financial advisors. Book topics range from portfolio managementto e-commerce, risk management, financial engineering, valuation and fi-nancial instrument analysis, as well as much more. For a list of available titles, please visit our Web site at www.WileyFinance.com. Financialderivatives Third Edition ROBERT W. KOLBJAMES A. OVERDAHL John Wiley & Sons, Inc.Copyright © 2003 by Robert W. Kolb and James A. Overdahl. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United States CopyrightAct, without either the prior written permission of the Publisher, or authorization throughpayment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web atwww.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030,201-748-6011, fax 201-748-6008, e-mail: permcoordinatorLimit of Liability/Disclaimer of Warranty: While the publisher and author have used their bestefforts in preparing this book, they make no representations or warranties with respect to theaccuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose. No warranty may be createdor extended by sales representatives or written sales materials. The advice and strategiescontained herein may not be suitable for your situation. You should consult with aprofessional where appropriate. Neither the publisher nor author shall be liable for any loss ofprofit or any other commercial damages, including but not limited to special, incidental,consequential, or other damages.The views expressed by the author (Overdahl) are his own and do not necessarily reflect theviews of the Commodity Futures Trading Commission or its staff.For general information on our other products and services, or technical support, pleasecontact our Customer Care Department within the United States at 800-762-2974, outside theUnited States at 317-572-3993 or fax 317-572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appears inprint may not be available in electronic books.ISBN 0-471-23232-7Printed in the United States of America.10 9 8 7 6 5 4 3 2 1To my splendid Lori, an original who is anythingbut derivative. R.W.K.To Janis, who is consistently above fair value. J.A.O. preface inancial Derivatives introduces the broad range of markets for financialF derivatives. A financial derivative is a financial instrument based on an-other more elementary financial instrument. The value of the financial de-rivative depends on, or derives from, the more basic instrument. Usually, thebase instrument is a cash market financial instrument, such as a bond or ashare of stock. Introductory in nature, this book is designed to supplement a widerange of college and university finance and economics classes. Every efforthas been made to reduce the mathematical demands placed on the student,while still developing a broad understanding of trading, pricing, and riskmanagement applications of financial derivatives. The text has two principal goals. First, the book offers a broad overviewof the different types of financial derivatives (futures, options, options on fu-tures, and swaps), while focusing on the principles that determine marketprices. These instruments are the basic building blocks of all more compli-cated risk management positions. Second, the text presents financial deriva-tives as tools for risk management, not as instruments of speculation. Whilefinancial derivatives are unsurpassed as tools for speculation, the book em-phasizes the application of financial derivatives as risk management tools ina cor ...