Table Of ContentFutures and Options
Concepts and Applications
Other titles by the author....
• Futures Markets: Made Easy with 250 Questions and Answers
• Interest Rates and Time Value of Money
• Financial Institutions, Instruments and Markets
• Futures Markets: Theory and Practice
• Equity Shares, Preferred Shares and Stock Market Indices
• Futures and Forwards
• Bond Valuation, Yield Measures and the Short Term Structure
• Fundamentals of Options
• Option Strategies
• Valuation of Options
Futures and Options
Concepts and Applications
Sunil K. Parameswaran
Professor of Finance
SDMIMD, Mysore, Karnataka
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To
My Parents
Savitri Parameswaran
and
Late A.S. Parameswaran
Foreword
It is a pleasure to introduce this excellent book on derivatives written by my old
friend, student and colleague Professor Sunil Parameswaran. Sunil was a
student of mine at the Fuqua School of Business, Duke University, from where
he obtained his doctorate. Subsequently, he has been teaching courses on
futures and options and risk management in India, and as a visiting Professor of
Finance at La Trobe University, Melbourne.
Sunil’s book has a number of attractive features that appeal to a seasoned
reader like me. One of the most satisfying aspects is that it gives substantial
attention to both futures, as well as, options markets. There are a number of
authors who have expounded on these topics in varying degrees of detail.
However, it has been my experience that most texts in this area cover either
futures or options in sufficient detail, while paying only superficial attention to
the other. The text makes no assumptions about prior knowledge on the part of
readers and builds the concepts from basic principles. Professor Parameswaran
has a unique and racy conversational style that gives a feeling to the reader that
he is sitting across the table having a conversation with him/her, and explaining
the concepts in simple language, the requisite mathematical details
notwithstanding. He has also made an attempt to seamlessly integrate the
features of the underlying products, such as bonds, foreign exchange, stock
indices, and money market securities. The advantage for the reader is the book
is a stand-alone text, and does not require the reader to necessarily refer to other
treatises in order to comprehend the concepts and issues.
The book is fairly mathematical in parts, as is to be expected from a work on
this subject. However, an appealing feature of the text is that the author has
made extensive use of the simple and easy to understand binomial model for
explaining the valuation of American options, and exotic options.
Some of the features which warrant a more extensive treatment are the
valuation of American options, numerical methods in option pricing, and credit
derivative products. I am sure that Sunil will do justice to these issues in a
subsequent edition.
The book has a global flavour and focus, although most of the market
specific details are with reference to the US derivatives market. Given its
emphasis on concepts and principles, the book warrants the attention of readers
at both the Bachelor’s and Master’s levels in all parts of the world, including
Asia and Australia. Market professionals too are likely to find the book to be a
useful resource for reference.
viii Foreword
I think readers will find this text a very instructive introduction to derivatives
which will help to demystify this very important topic. Beginners will find that it
facilitates the development of a solid foundation on which they can build up
their knowledge further with the aid of more advanced books. Readers with
prior knowledge of derivatives will also find the book useful for it reinforces the
fundamentals and provides an intermediate level perspective on the subject.
I thoroughly enjoyed reading the book and recommend the text without any
reservations.
TOM SMITH
Professor of Finance
School of Finance and Applied Statistics
College of Business and Economics
Australian National University
Canberra, Australia
Preface
I began teaching a course on financial derivatives in 1996 at a time when the
markets for such instruments did not exist in India. My interest in this fascinat-
ing subject was whetted by my experiences in the US as a Ph.D student where I
had an opportunity to take courses in futures and options at both the Master's as
well as doctoral levels. This book has grown out of my efforts to collate infor-
mation about derivatives trading in international financial markets, and present
them in a way that an inquisitive student of finance can relate to, not only in
India, but also in other parts of Asia and the rest of the world. The fact that
trading in financial futures and options is now booming even in developing
countries such as India and China, has only served to make this book more per-
tinent and relevant for students as well as professionals.
It has been my experience that books which seek to cover both futures and
options ultimately end up being unable to do justice to either of the two instru-
ments and the markets that they trade in. This book, consequently makes an
attempt to devote the required level of attention to both topics.
This book is intended primarily for second year MBA students. The entire
book can be covered in a course on financial derivatives or risk management.
Certain portions of the book should also be relevant for courses in international
finance and fixed income securities. Market professionals should also hopefully
find this book to be a one-stop reference on the subject.
The entire discussion is fairly technical and assumes an adequate level of
mathematical knowledge on the part of the reader. All major results have been
derived in adequate detail, for nothing is more frustrating for the reader than to
have an author present a result with a statement that ‘it should be obvious’.
Economics as a subject has become extremely quantitative over the years. I
suppose it is inevitable as a subject makes a transition from the realm of
humanities to become more of a social science. Finance, being an application of
economics, is no exception to this tendency. The other advantage of having
precise mathematical models is that they make theories culture-independent,
and consequently portable across countries.
It must be pointed out that this book does not claim to offer insights into
making a fast buck in the financial markets. It has been my experience that
people who preach can rarely practise and vice versa1, and keeping this maxim
in view, I have stuck to my perceived core competency.
1Unless one happens to be a medical practitioner or a lawyer, as well as, an ordained priest!
x Preface
This book has been written for the global market, and consequently the
proper nouns are Western, and the examples are largely from the markets in
developed countries, in order to ensure that students can relate to the book irre-
spective of their location. The final chapter however attempts to provide a rea-
sonably detailed coverage of the Indian market.
The market for financial derivatives is growing rapidly in countries like
India, as developing countries following the tenets of LPG (Liberalization,
Privatization, and Globalization) are integrating with the world economy. This
philosophy has led to an ever-increasing demand for knowledgeable finance
professionals, and has also facilitated their mobility across countries and
continents. Thus, knowledge of financial instruments such as futures and
options is imperative for people aspiring for a career in this area, and such skill
sets will certainly stand them in good stead.
I hope that this book will provide a firm platform for students and profession-
als wherever they may be, and facilitate their progress as they navigate their way
through a career in finance.
SUNIL K. PARAMESWARAN
