1.Chapter 1 Introduction

Contents 1.Chapter 1 Introduction 2.Chapter 2 Futures Markets and Central Counterparties 3.Chapter 3 Hedging Strategies Using Futures 4.Chapter 4 Interest Rates 5.Chapter 5 Determination of Forward and Futures Prices 6.Chapter 6 Interest Rate Futures 7.Chapter 7 Swaps 8.Chapter 8 Securitization and the Financial Crisis of 2007-8 9.Chapter 9 XVAs 10.Chapter 10 Mechanics of Options Markets 11.Chapter 11 Properties of Stock Options 12.Chapter 12 Trading Strategies Involving Options 13.Chapter 13 Binomial Trees 14.Chapter 14 Wiener Processes and Itô’s Lemma 15.Chapter 15 The Black-Scholes-Merton Model 16.Chapter 16 Employee Stock Options 17.Chapter 17 Options on Stock Indices and Currencies 18.Chapter 18 Futures Options and Black’s Model 19.Chapter 19 The Greek Letters 20.Chapter 20 Volatility Smiles and Volatility Surfaces 21.Chapter 21 Basic Numerical Procedures 22.Chapter 22 Value at Risk 23.Chapter 23 Estimating Volatilities and Correlations 24.Chapter 24 Credit Risk 25.Chapter 25 Credit Derivatives 26.Chapter 26 Exotic Options 27.Chapter 27 More on Models and Numerical Procedures 28.Chapter 28 Martingales and Measures

29.Chapter 29 Interest Rate Derivatives: The Standard Market Models

30.Chapter 30 Convexity, Timing, and Quanto Adjustments 31.Chapter 31 Equilibrium Models of the Short Rate 32.Chapter 32 No-Arbitrage Models of the Short Rate 33.Chapter 33 Modeling Forward Rates Options, Futures, and Other Derivatives, 11e John C Hull (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) Supplement Files Download Link at the end of this file. 1 / 4

• Chapter 34 Swaps Revisited
• Chapter 35 Energy and Commodity Derivatives
• Chapter 36 Real Options 2 / 4

Chapter 1 Introduction Short Concept Questions Practice Questions 1.1 A derivative is an agreement to enter into a future transaction. Its value depends on (or derives from) other more basic variables.

1.2 Derivatives trade on exchanges and in the over-the-counter (OTC) market) 1.3 Standardized derivatives between two financial institutions trade on swap execution facilities and are cleared through central counterparties. All trades must be reported to a central repository.

1.4 The OTC market is much bigger.

1.5 In a long forward, the trader is agreeing to buy an asset for a certain price at a certain future time. In a short forward, contract the trader is agreeing to sell an asset for a certain price at a certain future time.

1.6 Forward contracts trade in the over-the-counter market. Futures contracts trade on exchanges.

1.7 In the forward contract, the trader is committing to a future trade. In an option, the trader has the right but not the obligation to carry out the future trade.

1.8 Hedging involves reducing an existing risk. Speculation involves having a view on the market and taking a risk. Arbitrage involves locking in a profit by trading in two different markets.

1.9 Bid is the price at which a market maker is prepared to buy. Ask is the price at which the market maker is prepared to sell.

1.10 He speculated on future movements in equity indices and invented fictitious trades to give the appearance that he was an arbitrageur.

1.11 Selling a call option involves giving someone else the right to buy an asset from you. It gives you a payoff of Buying a put option involves buying an option from someone else. It gives a payoff of In both cases, the potential payoff is . When you write a call option, the payoff is negative or zero. (This is because the counterparty chooses whether to exercise.) When you buy a put option, the payoff is zero or positive. (This is because you choose whether to exercise.) 1.12 −max(S T−K,0)=min(K−S T,0) max(K−S T,0) K−S

T 3 / 4

• The investor is obligated to sell pounds for 1.3000 when they are worth 1.2900.

The gain is .

• The investor is obligated to sell pounds for 1.3000 when they are worth 1.3200.

The loss is 1.13

• The trader sells for 50 cents per pound something that is worth 48.20 cents per

pound. .

• The trader sells for 50 cents per pound something that is worth 51.30 cents per

pound. .

1.14 You have sold a put option. You have agreed to buy 100 shares for $40 per share if the party on the other side of the contract chooses to exercise the right to sell for this price. The option will be exercised only when the price of stock is below $40. Suppose, for example, that the option is exercised when the price is $30. You have to buy at $40 shares that are worth $30; you lose $10 per share, or $1,000 in total. If the option is exercised when the price is $20, you lose $20 per share, or $2,000 in total. The worst that can happen is that the price of the stock declines to almost zero during the three- month period. This highly unlikely event would cost you $4,000. In return for the possible future losses, you receive the price of the option from the purchaser.

1.15 One strategy would be to buy 200 shares. Another would be to buy 2,000 options.If the share price does well, the second strategy will give rise to greater gains. For example, if the share price goes up to $40 you gain from the second strategy and only from the first strategy. However, if the share price does badly, the second strategy gives greater losses. For example, if the share price goes down to $25, the first strategy leads to a loss of , whereas the second strategy leads to a loss of the whole $5,800 investment. This example shows that options contain built in leverage.

1.16 You could buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four months, the stock price proves to be less than $25, you can exercise the options and sell the shares for $25 each.

1.17 An exchange-traded stock option provides no funds for the company. It is a security sold by one investor to another. The company is not involved. By contrast, a stock when it is first issued, is sold by the company to investors and does provide funds for the company.

1.18 If a trader has an exposure to the price of an asset, a hedge with futures contracts can be used. If the trader will gain when the price decreases and lose when the price increases, a long futures position will hedge the risk. If the trader will lose when the price decreases and gain when the price increases, a short futures position will hedge the risk. Thus, either a long or a short futures position can be entered into for hedging purposes.If the trader has no exposure to the price of the underlying asset, entering into a futures contract is speculation. If the trader takes a long position, there is a gain when the

(1.3000−1.2900)×100,000=$1,000

(1.3200−1.3000)×100,000=$2,000

Gain=($0.5000−$0.4820)×50,000=$900 Loss=($0.5130−$0.5000)×50,000=$650

[2,000×($40−$30)]−$5,800=$14,200

200×($40−$29)=$2,200

200×($29−$25)=$800

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