Structured equity derivatives : the definitive guide to exotic options and structured notes / Harry M. Kat.

Format:

Book

Author/Creator:

Kat, Harry M.

Series:

Wiley finance series

Language:

English

Subjects (All):

Derivative securities.

Exotic options (Finance).

Structured notes (Securities).

Physical Description:

xviii, 372 pages : illustrations ; 25 cm.

Place of Publication:

Chichester ; New York : John Wiley, 2001.

Summary:

Harry M. Kat has over 12 years of experience in global capital markets, lastly as Head of Equity Derivatives Europe at Bank of America in London. Prior to that he was Head of Derivatives Structuring and Marketing at First Chicago in Tokyo and Head of Derivatives Research at MeesPierson in Amsterdam. He holds MBA and PhD degrees in economics and econometrics from the University of Amsterdam and is a member of the editorial board of The Journal of Derivatives and The Journal of Alternative Investments. Dr Kat has published extensively in the field of derivatives in well-known journals such as The Journal of Financial Engineering, The Journal of Derivatives, Applied Mathematical Finance and Risk. He is currently Associate Professor of Finance at the ISMA Centre at the University of Reading (UK), where he lectures on financial engineering and structured derivatives, and acts as a consultant to a select number of asset managers and hedge funds.

Contents:

1.2 Cash Flows 1

1.3 Reference Indices 2

1.4 Vanilla Index-Linked Cash Flows 2

1.4.1 Monetization 3

1.4.2 Currency Translation 3

1.4.3 Scaling 4

1.5 Structured Index-Linked Cash Flows 5

1.6 Zeros and Forwards 5

1.7 Contract Extensions 6

1.8 Tax, Accounting and Regulation 7

2 Stocks and Stock Market Indices 11

2.2 Common Stocks 11

2.3 Corporate Actions 13

2.3.1 Dividends 13

2.3.2 New Issues 14

2.3.3 Stock Splits 16

2.4 Index Calculation 16

2.5 Some Well-Known Stock Market Indices 19

2.6 The Behavior of Equity Indices 19

2.6.1 Visual Inspection 20

2.6.2 The GARCH (1,1) Model 23

2.6.3 Parameter Estimation 24

2.6.4 Did Return Behavior Change During the Nineties? 24

2.6.5 Forecasting Volatility with the GARCH (1,1) Model 25

3 Special Contract Features 29

3.2 Knock-In and Knock-Out Features 29

3.3 Barriers 30

3.3.1 The Barrier Variable 31

3.3.2 The Monitoring Points 31

3.3.3 The Barrier Level 32

3.3.4 The Nature of the Barrier 32

3.3.5 Lazy Barriers and Tranching 33

3.3.6 Index-Linked Multipliers 34

3.4 Double Barriers 34

3.5 The Right to Cancel a Contract 35

3.5.1 The Option Right 36

3.5.2 The Right to Exchange a Contract for Cash 37

3.5.3 The Right to Exchange One Contract for Another 38

3.6 The Right to Change a Contract Parameter 38

3.7 Rights and Automatic Features 39

4 Index-Linked Cash Flows 41

4.2 Fixed Cash Flows 41

4.3 Digitals 42

4.4 Vanilla Index-Linked Cash Flows 44

4.5 Baskets and Spreads 45

4.6 Ratios and Products 46

4.7 Highest and Lowest 47

4.8 Vanilla Returns 48

4.8.1 Single Index Returns 49

4.8.2 Basket Returns 49

4.8.3 The Basket as Reference Index 50

4.9 Arithmetic Averages 51

4.10 Average Returns 52

4.10.1 Single Index Average Returns 52

4.10.2 Basket Average Returns 53

4.10.3 The Basket as Reference Index 54

4.11 Vanilla Extrema 54

4.12 Stepwise Extrema 55

4.13 Extended Stepwise Extrema 58

4.14 Piecewise Linear Cash Flows 59

4.15 Cliquets 60

4.16 Hamsters 60

4.17 Vanilla Forwards and Ordinary Options 63

5 Pricing and Hedging 67

5.2 Pricing and Hedging in General 67

5.3 The Expected Hedging Costs 69

5.4 Time Value 72

5.5 A Shortcut for the Expected Hedging Costs 74

5.6 Putting Theory into Practice: Hedging Errors 76

5.6.1 Jumps 77

5.6.2 Discrete Trading 77

5.6.3 Transaction Costs 80

5.6.4 Volatility Misprediction 83

5.7 Putting Theory into Practice: Simulation 87

5.7.1 The Model 87

5.7.2 Simulation Results 89

5.8 Futures Market Execution 94

5.9 Alternative Hedging Strategies 96

5.9.1 Common Sense Hedging 96

5.9.2 Taylor Series Hedging 98

5.9.3 (Semi-)Static Hedging 101

5.10 The Expected Hedging Costs Again 101

6 Improving Efficiency 105

6.2 Indexation 105

6.2.1 DIY Indexation 106

6.2.2 Index Participations 107

6.2.3 Pricing Index Participations 108

6.3 Leveraged Buying and Short-Selling 110

6.3.1 Leveraged Buying 110

6.3.2 Short-Selling 111

6.3.3 Pricing Vanilla Forwards 112

6.4 Switching from Equity to Cash 115

6.4.2 Non-Index Portfolios 116

6.4.3 Multi-Period Contracting 119

6.5 Switching from Equity to Bonds 124

6.6 Synthetic Indexation and Alpha Extraction 124

6.6.1 Enhancing Index Returns 125

6.6.2 Enhancing Money Market Returns 126

6.6.3 Pure Alpha Extraction 126

6.7 Different Problems, Same Solution 127

6.7.1 Expansion of the Investment Universe 127

6.7.2 Management of Concentrated Equity Risk 128

7 Risk Management 131

7.2 Derivatives in Investment Management 131

7.3 Protected Leveraged Buying and Short-Selling 133

7.3.1 Protected Leveraged Buying 133

7.3.2 Protected Short-Selling 134

7.3.3 The Option Premium 134

7.4 Optimal Asset Allocation 137

7.4.1 The Best of Equity and Cash (Portfolio Insurance) 137

7.4.2 The Best of Equity and Bonds 146

7.4.3 The Best of Equity, Bonds and Cash 152

7.5 Yield Enhancement 155

7.6 Reducing the Risk of Writing Calls 157

7.6.1 Raising the Strike 157

7.6.2 Writing Less 157

7.6.3 Piecewise Linear Segmentation 158

7.6.4 Knock-In and Knock-Out Features 160

7.7 Collars 162

7.8 Synthetics 165

7.8.1 Portfolio Insurance 165

7.8.2 Yield Enhancement 166

7.9 Separating FX Risk From Equity Risk 166

7.9.1 The FX Lock 167

7.9.2 The FX Lock Option 169

7.10 Improving the Timing of Market Entry and Exit 170

7.10.1 Market Entry 171

7.10.2 Market Exit 175

7.10.3 DIY Ladders 177

8 Reducing the Costs of Buying Options 179

8.2 Changing the Contract Parameters 180

8.3 Changing the Reference Index 180

8.3.1 A Higher Dividend Yield 180

8.3.2 Basket Options 181

8.4 Buying Less 183

8.5 Piecewise Linear Segmentation 183

8.6 Knock-In and Knock-Out Options 185

8.6.1 Inside Barrier Options 186

8.6.2 Outside Barrier Options 188

8.6.3 Inside versus Outside Barriers 190

8.7 Changing Exchange Rate Risk 192

8.8 Pay-Later and Money-Back Options 193

8.8.1 Path-Independent Money-Backs and Pay-Laters 194

8.8.2 Path-Dependent Money-Backs and Pay-Laters 199

8.9 Instalment Options 200

8.10 Callable Options 202

8.11 Asian Options 204

8.12 Revised Monitoring of the Index 205

8.12.1 Lookback and Ladder Options 205

8.12.2 Barrier Options 207

8.12.3 Asian Options 209

9 Equity-Linked Bull Notes 213

9.2 Structuring Retail Products 213

9.3 The General Structure of a Note Issue 216

9.4 The Structuring Process 218

9.5 Unprotected Bull Notes 220

9.5.1 Vanilla Bull Note 220

9.5.2 Vanilla Bull Note with a Reduced Base 222

9.5.3 Capped Bull Note 224

9.5.4 Capped Bull Note with Knock-In/Knock-Out Downside Risk 232

9.6 Principal Protected Bull Notes 236

9.7 The Market for Principal Protected Bull Notes 239

9.8 Some Practical Considerations 241

9.8.1 Dealing with a Marketing Period 241

9.8.2 Avoiding Surprises 242

10 Raising the Participation Rate 245

10.2 Changing the Note Parameters 246

10.2.1 A Higher Base 246

10.2.2 A Longer Time to Maturity 247

10.3 Changing the Reference Index 249

10.3.1 A Higher Dividend Yield 249

10.3.2 A Basket of Indices 249

10.3.3 A Foreign Reference Index 250

10.4 Buying Less Protection 253

10.5 Piecewise Linear Segmentation of the Protection 253

10.6 Piecewise Linear Segmentation of the Upside 256

10.7 A Floating Cap on the Upside 259

10.8 Knock-In and Knock-Out Protection 261

10.9 Knock-In and Knock-Out Upside 263

10.10 Changing Exchange Rate Risk 265

10.11 An Asian Tail 267

10.12 Revised Monitoring of the Index 269

10.13 Additional Risks 269

10.14 One Last Trick 270

11 Market Timing and Non-Bullish Views 273

11.2 Timing Market Exit 273

11.2.1 Principal Protected Lookback and Ladder Bull Notes 274

11.2.2 Principal Protected Asian Bull Note 277

11.2.3 Principal Protected Cliquet Bull Note 277

11.3 Timing Market Entry 280

11.4 Notes for Non-Bullish Views 282

11.4.1 Principal Protected Bear Note 283

11.4.2 Principal Protected Mixed and Chooser Notes 285

11.4.3 Principal Protected Neutral Note 287

11.4.4 Principal Protected Range Accrual Note 289

11.4.5 Principal Protected Knock-Out Range Accrual Note 292

11.5 Notes Offering Improved Asset Allocation 296

12 Digital and Coupon Bearing Notes 301

12.2 Digitalized Notes 301

12.2.1 Digital Principal Protected Bull Note 301

12.2.2 Digital Principal Protected Cliquet Bull Note 304

12.2.3 Bivariate Digital Principal Protected Cliquet Bull Note 306

12.2.4 Digital Principal Protected Range Accrual Note 309

12.2.5 Digital Principal Protected Knock-Out Range Accrual Note 310

12.3 Notes with Intermediate Coupons 313

12.3.1 Fixed Coupons 313

12.3.2 Index-Linked Coupons 315

13 Equity-Linked Saving 319

13.2 Unprotected Equity-Linked Saving 319

13.3 Protected Equity-Linked Saving 323

13.4 Alternative Hedges 324

13.5 The Marketer's Perspective 325

13.6 The Investor's Perspective 326

13.7 A Real-Life Example 328

13.8 Variations in Protected Equity-Linked Saving 329

13.8.1 The Disappointment Bonus 329

13.8.2 The Partial Cap 331

13.8.3 Money-Back Structures 332

13.8.4 Segmented Payoff Functions 332

13.8.5 Variations in Investor Payment 333

A.1 S&P 500 335

A.2 Dow Jones Industrial Average 336

A.3 Eurotop 100 336

A.4 Eurostoxx 50 336

A.5 FTSE 100 337

A.6 DAX 337

A.7 AEX 337

A.8 SMI 337

A.9 CAC 40 337

A.10 IBEX 35 338

A.11 MIB 30 338

A.12 Nikkei 225 338

A.13 Hang Seng 338

A.14 ASX All Ordinaries 339.

Notes:

Includes bibliographical references (pages [347]-366) and index.

ISBN:

0471486523

OCLC:

45958275