Schofield Equity Derivatives

Corporate and Institutional Applications
1. Auflage 2017
ISBN: 978-0-230-39107-9
Verlag: Palgrave Macmillan UK
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, 502 Seiten

Reihe: History

This book provides thorough coverage of the institutional applications of equity derivatives. It starts with an introduction on stock markets' fundamentals before opening the gate on the world of structured products. Delta-one products and options are covered in detail, providing readers with deep understanding of the use of equity derivatives strategies. The book features most of the traded payoffs and structures and covers all practical aspects of pricing and hedging. The treatment of risks is performed in a very intuitive fashion and provides the reader with a great overview of how dealers approach such derivatives. The author also delivers various common sensical reasons on which models to use and when.

By discussing equity derivatives in a practical, non-mathematical and highly intuitive setting, this book enables practitioners to fully understand and correctly structure, price and hedge these products effectively, and stand strong as the only book in its class to make these equity-related concepts truly accessible.

Neil C. Schofield is the Managing Director of Financial Markets Training Ltd. and delivers training courses in the areas of treasury, derivatives, capital markets and risk management to financial institutions, central banks and corporations worldwide. Neil was global head of Financial Markets training at Barclays Capital from 2001 to 2008. He teaches primarily on the rates business, covering all of the major asset classes and their respective derivative products from foreign exchange through to commodities.
Before joining Barclays Capital, he was a director at Chisholm-Roth Training for 4 years, where he was responsible for provision of training services for a number of blue chip global investment banks. He started his training career at Chase Manhattan Bank, where he was originally employed as an internal auditor. Neil holds a B.Sc. in Economics from Loughborough University, UK, and an MBA from Manchester Business School, UK. He was elected as a Fellow of the IFS School of Finance (formerly the Chartered Institute of Bankers) in 1999. Neil was appointed as a Visiting Fellow at the University of Reading ICMA Centre, UK, in April, 2007.

Autoren/Hrsg.

Schofield, Neil C

Inhaltsverzeichnis

1;Acknowledgements;5
2;Contents;7
3;List of Figures;9
4;List of Tables;18
5;1: Equity Derivatives: The Fundamentals;23
5.1;1.1 Chapter Overview;23
5.2;1.2 Fundamental Concepts;23
5.2.1;1.2.1 Corporate Capital Structures;23
5.2.2;1.2.2 Types of Equity;24
5.2.3;1.2.3 Equity Indices;25
5.2.4;1.2.4 Volume-Weighted Average Price;29
5.2.5;1.2.5 Share Price Dilution;30
5.2.6;1.2.6 Stock Lending and Equity Repo;32
5.3;1.3 Equity Derivatives;38
5.3.1;1.3.1 Forwards and Futures;38
5.3.2;1.3.2 Equity Swaps;41
5.3.3;1.3.3 Equity Options;42
5.3.4;1.3.4 Exotic Equity Options;45
5.4;1.4 Overview of Secondary Equity Markets;47
5.4.1;1.4.1 Institutional Investors;47
5.4.2;1.4.2 Pension Funds;49
5.4.3;1.4.3 Unit Trusts/Mutual Funds;50
5.4.4;1.4.4 Investment Trusts;50
5.4.5;1.4.5 Hedge Funds;51
5.4.6;1.4.6 Exchange-Traded Funds;51
5.5;1.5 Overview of the Equity Derivative Markets;54
6;2: Corporate Actions;56
6.1;2.1 Introduction;56
6.2;2.2 The Ratio Method;57
6.3;2.3 Mergers;58
6.4;2.4 Special Dividend;59
6.5;2.5 Restructuring;60
6.6;2.6 Spin-offs;61
6.7;2.7 Return of Capital;61
6.8;2.8 Stock Split;61
6.9;2.9 Reverse Stock Split;62
6.10;2.10 Rights Issues;62
6.11;2.11 Bonus Issue;63
6.12;2.12 Share Buybacks;63
6.13;2.13 Summary;64
7;3: Equity Valuation;65
7.1;3.1 Introduction;65
7.2;3.2 Financial Statements;66
7.2.1;3.2.1 The Balance Sheet;67
7.2.1.1;3.2.1.1 Asset Conversion Cycle;69
7.2.2;3.2.2 The Income Statement;70
7.2.3;3.2.3 Cash Flow Statement;72
7.3;3.3 Valuation Techniques;73
7.3.1;3.3.1 Dividend Discount Model;74
7.3.2;3.3.2 Free Cash Flow Approaches;77
7.3.3;3.3.3 Calculating the Terminal Value;80
7.3.4;3.3.4 Calculating the Weighted Average Cost of Capital;81
7.4;3.4 Comparable Company Analysis;83
7.4.1;3.4.1 Profitability Ratios;85
7.4.2;3.4.2 Margin Ratios;86
7.4.3;3.4.3 Share Price Ratios;86
7.4.4;3.4.4 Enterprise Value Multiples;90
7.4.5;3.4.5 Identifying Mispriced Shares;92
7.5;3.5 Conclusion;92
8;4: Valuation of Equity Derivatives;93
8.1;4.1 Chapter Overview;93
8.2;4.2 Valuation of Single Stock Equity Forwards and Futures;93
8.3;4.3 Valuation of Index Forwards and Futures;96
8.3.1;4.3.1 No Arbitrage Valuation Principles;96
8.3.2;4.3.2 Implied Equity Repo Rates;98
8.3.3;4.3.3 Withholding Tax;100
8.4;4.4 Valuation of Equity Index Swaps;101
8.4.1;4.4.1 Intuitive Approach to Equity Swap Valuation;101
8.4.2;4.4.2 Linking the Equity Repo and Equity Swaps Market;103
8.4.3;4.4.3 Discounted Cash Flow Approach to Swap Valuation;105
8.4.4;4.4.4 Interest Rate Exposure of Equity Swaps;108
8.4.5;4.4.5 Overnight Index Swap (OIS) Discounting;109
8.4.6;4.4.6 Hedging Equity Swaps;110
8.5;4.5 Valuation of Equity Options;110
8.5.1;4.5.1 Intuitive Approach to Option Pricing;110
8.6;4.6 Changes in an Option’s Fair Value;115
8.6.1;4.6.1 Change in the Spot Price;115
8.6.2;4.6.2 Change in Time to Maturity;116
8.6.3;4.6.3 Change of Implied Volatility;118
8.6.4;4.6.4 Change in Interest Rates;119
8.6.5;4.6.5 Change of Dividend Yield and Equity Repo Rates;120
8.7;4.7 Early Exercise of American -Style Options;121
8.8;4.8 Put-Call Parity;122
8.9;4.9 Summary;123
9;5: Risk Management of Vanilla Equity Options;124
9.1;5.1 Introduction;124
9.2;5.2 Delta;124
9.3;5.3 Gamma;129
9.3.1;5.3.1 Definition and Characteristics;129
9.3.2;5.3.2 The Delta–Gamma Relationship;132
9.3.3;5.3.3 The Delta–Gamma–Theta Relationship;137
9.4;5.4 Delta and Gamma ‘Cash’ Limits;138
9.5;5.5 Theta;140
9.6;5.6 Interest Rates and Dividend Yield;144
9.7;5.7 Vega;145
9.8;5.8 Non-constant Volatility;147
9.9;5.9 Second Order Greeks;152
9.9.1;5.9.1 Volgamma;152
9.9.2;5.9.2 Vanna;155
9.10;5.10 Summary;157
10;6: Volatility and Correlation;158
10.1;6.1 Introduction;158
10.2;6.2 Definitions;158
10.2.1;6.2.1 Variance and Volatility;158
10.2.1.1;6.2.1.1 Different Types of Volatility;161
10.2.2;6.2.2 Covariance and Correlation;162
10.3;6.3 Overview of Volatility and Correlation Trading Strategies;165
10.3.1;6.3.1 Market ‘Flows’ of Volatility;165
10.3.2;6.3.2 Trading Volatility—An Overview;166
10.3.3;6.3.3 Trading Correlation—An Overview;167
10.4;6.4 Characteristics of Volatility and Correlation;168
10.4.1;6.4.1 Characteristics of Volatility;169
10.4.1.1;6.4.1.1 Implied Volatility Versus the Level of the Market;169
10.4.1.2;6.4.1.2 Implied versus Realized Volatility;169
10.4.1.3;6.4.1.3 Index Volatility Versus Single Stock Volatility;169
10.4.1.4;6.4.1.4 Volatility Skew;175
10.4.1.5;6.4.1.5 Term Structure of Volatility;187
10.4.1.6;6.4.1.6 The Volatility Surface;191
10.4.1.7;6.4.1.7 How Volatile Is Volatility?;194
10.4.1.8;6.4.1.8 Volatility Regimes;199
10.4.2;6.4.2 Characteristics of Correlation;201
10.4.2.1;6.4.2.1 Correlation Versus Market Level Versus Implied Volatility;201
10.4.2.2;6.4.2.2 Implied Versus Realized Correlation;204
10.4.2.3;6.4.2.3 Correlation Skew;204
10.4.2.4;6.4.2.4 Term Structure of Correlation;204
10.5;6.5 Identifying Value in Volatility and Correlation;204
10.5.1;6.5.1 Volatility;209
10.5.2;6.5.2 Correlation;215
10.6;6.6 Conclusion;215
10.7;6.7 Appendix 1;218
10.7.1;6.7.1 Calculating Variance, Standard Deviations (‘Volatility’), Covariance and Correlation;218
10.7.1.1;6.7.1.1 Calculating Variance and Standard Deviation (‘Volatility’);218
10.7.1.2;6.7.1.2 Calculating Covariance and Correlation;220
10.8;6.8 Appendix 2;221
10.8.1;6.8.1 Calculating Forward Volatility;221
11;7: Barrier and Binary Options;222
11.1;7.1 Introduction;222
11.2;7.2 Barrier Options;222
11.2.1;7.2.1 Features of Barrier Options;222
11.2.2;7.2.2 Valuation of Barrier Options;225
11.2.3;7.2.3 Risk Management of Regular Barrier Call Options;228
11.2.3.1;7.2.3.1 Regular Knock in Call Option;228
11.2.3.2;7.2.3.2 Regular Knock Out Call Option;230
11.2.4;7.2.4 Risk Management of Reverse Barrier Call Options—I;234
11.2.4.1;7.2.4.1 Reverse Knock in Call Option—I;234
11.2.4.2;7.2.4.2 Reverse Knock Out Call Option—I;236
11.2.4.3;7.2.4.3 Barrier/Exit Risk;240
11.2.5;7.2.5 Risk Management of Reverse Barrier Call Options—II;245
11.2.5.1;7.2.5.1 Reverse Knock in Call Options—II;246
11.2.5.2;7.2.5.2 Reverse Knock Out Call Options—II;249
11.2.6;7.2.6 Barrier Parity;253
11.2.7;7.2.7 Other Barrier Options;254
11.3;7.3 Binary Options;254
11.3.1;7.3.1 Overview;254
11.3.2;7.3.2 Pricing of Binary Options;256
11.3.3;7.3.3 Risk Management of American-Style Binary Options;257
11.3.4;7.3.4 Features of European-Style Binary Options;260
11.3.5;7.3.5 Risk management of European-Style Binary Options;261
11.4;7.4 Summary;265
12;8: Correlation-Dependent Exotic Options;266
12.1;8.1 Introduction;266
12.2;8.2 Basket Options;266
12.2.1;8.2.1 Introduction;266
12.2.2;8.2.2 Example of a Basket Option;267
12.2.3;8.2.3 Volatility of a Portfolio;269
12.2.4;8.2.4 Correlation and the Basket Option Premium;271
12.3;8.3 Best of and Worst of Structures;272
12.3.1;8.3.1 Introduction;272
12.3.2;8.3.2 Expiry Payoffs;272
12.3.3;8.3.3 Valuation and Risk Management of ‘Best of’ and ‘Worst of’ Options;275
12.3.4;8.3.4 ‘Best of’ Call Option;275
12.3.5;8.3.5 ‘Worst of’ Call Option;276
12.4;8.4 Outperformance Options;277
12.4.1;8.4.1 Introduction;277
12.4.2;8.4.2 Expiry Payoffs;278
12.4.3;8.4.3 Valuation Principles;279
12.4.4;8.4.4 Impact of Correlation;280
12.4.5;8.4.5 Impact of Volatility;282
12.5;8.5 Quanto and Composite Options;283
12.5.1;8.5.1 Plain Vanilla Call with No Currency Protection;283
12.5.2;8.5.2 Quanto Call Option;283
12.5.3;8.5.3 Composite Call Option;286
12.6;8.6 Summary;288
13;9: Equity Forwards and Futures;290
13.1;9.1 Introduction;290
13.2;9.2 Forward and Futures Risk;290
13.3;9.3 Rolling a Futures Exposure;292
13.4;9.4 Index Arbitrage;293
13.5;9.5 Hedging Applications;295
13.5.1;9.5.1 Using Futures to Hedge a Portfolio of Shares;295
13.5.2;9.5.2 Using Forwards to Hedge the Delta Risk of an Exotic Option Portfolio;298
13.5.3;9.5.3 Use of Futures to Short the Market;298
13.5.4;9.5.4 Tactical Asset Allocation;298
13.6;9.6 Trading Strategies;300
13.6.1;9.6.1 Futures Spread Trades;300
13.6.2;9.6.2 Forward Trades;302
13.7;9.7 Exchange for Physical;302
13.7.1;9.7.1 Product Fundamentals;302
13.7.2;9.7.2 Using EFPs to Trade the Implied Equity Repo Rate;303
13.8;9.8 Summary;304
14;10: Equity Swaps;305
14.1;10.1 Introduction;305
14.2;10.2 Fundamentals of Equity Swaps;305
14.3;10.3 Equity Swaps Variants;308
14.4;10.4 Motivations for Using Equity Swaps;309
14.5;10.5 Institutional Applications;311
14.5.1;10.5.1 Dividend Taxation Arbitrage;311
14.5.2;10.5.2 ‘Covered Swap’ Transaction;313
14.5.3;10.5.3 Trading the Implied Equity Repo Rate;313
14.5.3.1;10.5.3.1 Term Structure of Equity Repo Rates;313
14.5.3.2;10.5.3.2 Trading the Equity Repo Rate;314
14.5.4;10.5.4 Cross-Currency Equity Swaps;317
14.6;10.6 Corporate Applications;320
14.6.1;10.6.1 Mergers and Acquisitions;320
14.6.2;10.6.2 Financing Shareholdings;323
14.6.3;10.6.3 Monetization of Cross Shareholdings;325
14.6.4;10.6.4 Diversification of Cross Shareholdings;326
14.7;10.7 Contracts of Difference;326
14.7.1;10.7.1 Product Fundamentals;327
14.7.2;10.7.2 Applications;330
14.8;10.8 Summary;331
15;11: Investor Applications of Equity Options;332
15.1;11.1 Introduction;332
15.2;11.2 Portfolio Downside Protection;332
15.2.1;11.2.1 Buy a Put Option;333
15.2.2;11.2.2 Put Spread;335
15.2.3;11.2.3 Collars;336
15.2.4;11.2.4 Prepaid Variable Forward;339
15.2.5;11.2.5 Cash Extraction;343
15.3;11.3 Expressing Directional Views;343
15.3.1;11.3.1 Buying the Underlying Versus Buying a Call Option;344
15.3.2;11.3.2 Call Spread;345
15.3.3;11.3.3 1 × 2 Call Spread6;347
15.3.4;11.3.4 Comparison of Directional Strategies;347
15.4;11.4 Range-Bound Versus Volatile Views;350
15.4.1;11.4.1 Straddles;350
15.4.2;11.4.2 Strangle;352
15.4.3;11.4.3 Comparison of Volatility Strategies;352
15.5;11.5 Yield Enhancement Strategies;354
15.5.1;11.5.1 Covered Calls/Call Overwriting;354
15.5.2;11.5.2 Call Spread Overwriting;356
15.5.3;11.5.3 Put Selling;357
15.6;11.6 Outperformance Strategies;357
15.6.1;11.6.1 Option Ratios;358
15.6.2;11.6.2 Risk Reversals;360
15.6.3;11.6.3 Outperformance Options;362
15.7;11.7 Conclusion;363
16;12: Structured Equity Products;364
16.1;12.1 Introduction;364
16.2;12.2 Capital Protected Notes;365
16.3;12.3 Yield Enhanced Structures;372
16.4;12.4 Income Structures;376
16.5;12.5 Volatility Structures;380
16.6;12.6 Hybrid Structures;384
16.7;12.7 Structured Product Risk Management;386
16.7.1;12.7.1 Introduction: Autocallable Market Risks;386
16.7.2;12.7.2 Market Risk Associated with Digital Options;386
16.7.3;12.7.3 Market Risk Associated with ‘down and in’ Put Option;388
16.7.3.1;12.7.3.1 Delta Risk;388
16.7.3.2;12.7.3.2 Dividend Risk;391
16.7.3.3;12.7.3.3 Vega Exposures;391
16.7.4;12.7.4 Asian Autocallable Structures;393
16.8;12.8 Summary;397
16.9;12.9 Appendix;398
17;13: Traded Dividends;401
17.1;13.1 Introduction;401
17.2;13.2 Sources of Traded Dividend Risk;401
17.3;13.3 Dividends as an Asset Class;402
17.4;13.4 Dividend Futures;403
17.5;13.5 Dividend Swaps;406
17.5.1;13.5.1 Features of Dividend Swaps;406
17.5.2;13.5.2 Quotation Conventions;408
17.5.3;13.5.3 Example Transaction;409
17.5.4;13.5.4 Early Termination;410
17.5.5;13.5.5 Novation;411
17.5.6;13.5.6 Dividend Swap Risk;411
17.5.7;13.5.7 Hedging Applications of Dividend Swaps;411
17.5.8;13.5.8 Principles of Index Dividend Swap Valuation;412
17.5.8.1;13.5.8.1 Forward Pricing;412
17.5.8.2;13.5.8.2 Extracting Implied Dividends from Options;413
17.5.8.3;13.5.8.3 Bottom Up Approach;414
17.5.9;13.5.9 Pull to Realized;414
17.6;13.6 Dividend Options;415
17.6.1;13.6.1 Dividend Option Valuation;417
17.6.2;13.6.2 Characteristics of Implied Dividend Volatility;418
17.6.3;13.6.3 Applications;420
17.7;13.7 A Relative Value Approach to Traded Dividend Investing;420
17.7.1;13.7.1 Introducing the Framework;420
17.7.2;13.7.2 Applying the RV Triangle: Individual Products;423
17.7.2.1;13.7.2.1 Cash Markets;423
17.7.2.2;13.7.2.2 Dividend Futures and Swaps;423
17.7.2.3;13.7.2.3 Dividend Options;426
17.7.3;13.7.3 Applying the RV Triangle: Relationships Between Products;427
17.7.3.1;13.7.3.1 Cash Versus Futures/Swap;427
17.7.3.2;13.7.3.2 Trading the Dividend Yield;427
17.7.4;13.7.4 Other Relative Value Trades;428
17.7.4.1;13.7.4.1 Dividends Versus Interest Rates;428
17.7.4.2;13.7.4.2 Dividend Dispersion Trades;430
17.7.4.3;13.7.4.3 High Versus Low Yielding Stock;431
17.7.4.4;13.7.4.4 Capital Structure Trades;431
17.8;13.8 Summary;432
18;14: Trading Volatility;433
18.1;14.1 Introduction;433
18.2;14.2 Conventional Option Trades;433
18.3;14.3 Volatility Surface Trades;434
18.3.1;14.3.1 Trading the Slope of the Skew;435
18.3.2;14.3.2 Trading the Curvature of the Skew;437
18.3.3;14.3.3 Trading the Slope of the Term Structure;438
18.4;14.4 Range Trades;441
18.5;14.5 Listed Volatility Contracts;442
18.5.1;14.5.1 The VIX®;442
18.5.2;14.5.2 VIX® Futures;443
18.5.3;14.5.3 Options on the VIX®;445
18.6;14.6 Trading Volatility Using Swaps;447
18.6.1;14.6.1 Variance and Volatility Swaps;447
18.6.1.1;14.6.1.1 Features;447
18.6.1.2;14.6.1.2 Valuation: The Intuition;452
18.6.1.3;14.6.1.3 Mark-to-Market;458
18.6.1.4;14.6.1.4 Applications;460
18.6.2;14.6.2 Forward Variance Swaps;467
18.6.3;14.6.3 Conditional Variance Swaps;468
18.6.4;14.6.4 Corridor Variance Swaps;470
18.6.5;14.6.5 Gamma Swaps;473
18.7;14.7 Options on Realized Variance;474
18.7.1;14.7.1 Features;474
18.7.2;14.7.2 Applications;475
18.8;14.8 Summary;476
19;15: Trading Correlation;477
19.1;15.1 Introduction;477
19.2;15.2 Sources of Correlation;478
19.3;15.3 Factors that Influence Correlation;479
19.4;15.4 Correlation Trading;480
19.4.1;15.4.1 Correlation-Dependent Exotics;480
19.4.2;15.4.2 Correlation Swaps;480
19.4.3;15.4.3 Basket Call Versus a Basket of Calls;481
19.4.4;15.4.4 Covariance Swaps;484
19.4.5;15.4.5 Dispersion Trading;487
19.4.5.1;15.4.5.1 Definition;487
19.4.5.2;15.4.5.2 Quoting Conventions;487
19.4.5.3;15.4.5.3 Choice of Instruments;488
19.4.5.4;15.4.5.4 Dispersion Trade Weighting Techniques;489
19.4.5.5;15.4.5.5 Dispersion Options;491
19.5;15.5 Summary;493
20;Bibliography;494
21;Index;496