Options, Futures, and Other Derivatives (5th Edition) [Hardcover]

John C. Hull (Author)

Book Description

ISBN-10: 0130090565 | ISBN-13: 978-0130090560 | Publication Date: July 3, 2002 | Edition: 5

For undergraduate and graduate courses in Options and Futures, Financial Engineering, and Risk Management, typically found in business, finance, economics and mathematics departments. This fifth edition text represents how academia and real-world practice have come together with a common respect and focus of theory and practice. It provides a unifying approach to the valuation of all derivatives. This popular course text is considered to be "the bible" by practitioners. The fifth edition has a total of seven new chapters.

Editorial Reviews

From the Back Cover

JOHN C. HULL'S Options, Futures, and Other Derivatives is unique in that it is both a best-selling college textbook and the "bible" in trading rooms throughout the world.

The Fifth Edition continues to offer the most current topics in the field with the addition of seven NEW chapters:

• CHAPTER 4—"Hedging Strategies Using Futures," a new chapter on the use of futures for hedging.
• CHAPTER 20—"More on Models and Numerical Procedures."
• CHAPTER 25—"Swaps Revisited," gives the reader insight into the range of nonstandard swap products.
• CHAPTER 27—"Credit Derivatives," explains how these products work and how they should be valued.
• CHAPTER 28—"Real Options," provides realistic examples showing how the real options approach can be used in capital investment appraisal.
• CHAPTER 29—"Insurance, heather, and Energy Derivatives," explains non-traditional derivatives and their role in risk management.
• CHAPTER 30—"Derivatives, Mishaps, and What We Can Learn From Them."

A new version of DerivaGem Software (Version 1.50) comes with every copy of the text. It includes a new Applications Builder module. Updates to the software can be downloaded from www.prenhall.com/hull.

Excerpt. © Reprinted by permission. All rights reserved.

It is sometimes hard for me to believe that the first edition of this book was only 330 pages and 13 chapters long! There have been many developments in derivatives markets over the last 15 years and the book has grown to keep up with them. The fifth edition has seven new chapters that cover new derivatives instruments and recent research advances.

Like earlier editions, the book serves several markets. It is appropriate for graduate courses in business, economics, and financial engineering. It can be used on advanced undergraduate courses when students have good quantitative skills. Also, many practitioners who want to acquire a working knowledge of how derivatives can be analyzed find the book useful.

One of the key decisions that must be made by an author who is writing in the area of derivatives concerns the use of mathematics. If the level of mathematical sophistication is too high, the material is likely to be inaccessible to many students and practitioners. If it is too low, some important issues will inevitably be treated in a rather superficial way. I have tried to be particularly careful about the way I use both mathematics and notation in the book. Nonessential mathematical material has been either eliminated or included in end-of-chapter appendices. Concepts that are likely to be new to many readers have been explained carefully, and many numerical examples have been included.

The book covers both derivatives markets and risk management. It assumes that the reader has taken an introductory course in finance and an introductory course in probability and statistics. No prior knowledge of options, futures contracts, swaps, and so on is assumed. It is not therefore necessary for students to take an elective course in investments prior to taking a course based on this book. There are many different ways the book can be used in the classroom. Instructors teaching a first course in derivatives may wish to spend most time on the first half of the book. Instructors teaching a more advanced course will find that many different combinations of the chapters in the second half of the book can be used. I find that the material in Chapters 29 and 30 works well at the end of either an introductory or an advanced course. What's New?

Material has been updated and improved throughout the book. The changes in this edition include:
* A new chapter on the use of futures for hedging (Chapter 4). Part of this material was previously in Chapters 2 and 3. The change results in the first three chapters being less intense and allows hedging to be covered in more depth.
* A new chapter on models and numerical procedures (Chapter 20). Much of this material is new, but some has been transferred from the chapter on exotic options in the fourth edition.
* A new chapter on swaps (Chapter 25). This gives the reader an appreciation of the range of nonstandard swap products that are traded in the over-the-counter market and discusses how they can be valued.
* There is an extra chapter on credit risk. Chapter 26 discusses the measurement of credit risk and credit value at risk while Chapter 27 covers credit derivatives.
* There is a new chapter on real options (Chapter 28). There is a new chapter on insurance, weather, and energy derivatives (Chapter 29).
* There is a new chapter on derivatives mishaps and what we can learn from them (Chapter 30).
* The chapter on martingales and measures has been improved so that the material flows better (Chapter 21).
* The chapter on value at risk has been rewritten so that it provides a better balance between the historical simulation approach and the model-building approach (Chapter 16).
* The chapter on volatility smiles has been improved and appears earlier in the book. (Chapter 15).
* The coverage of the LIBOR market model has been expanded (Chapter 24).
* One or two changes have been made to the notation. The most significant is that the strike price is now denoted by K rather than X.
* Many new end-of-chapter problems have been added. Software

A new version of DerivaGem (Version 1.50) is released with this book. This consists of two Excel applications: the Options Calculator and the Applications Builder. The Options Calculator consists of the software in the previous release (with minor improvements). The Applications Builder consists of a number of Excel functions from which users can build their own applications. It includes a number of sample applications and enables students to explore the properties of options and numerical procedures more easily. It also allows more interesting assignments to be designed.

The software is described more fully at the end of the book. Updates to the software can be downloaded from my website: rotman.utoronto.ca/~hull Slides

Several hundred PowerPoint slides can be downloaded from my website. Instructors who adopt the text are welcome to adapt the slides to meet their own needs. Answers to Questions

As in the fourth edition, end-of-chapter problems are divided into two groups: "Questions and Problems" and "Assignment Questions". Solutions to the Questions and Problems are in Options, Futures, and Other Derivatives: Solutions Manual, which is published by Prentice Hall and can be purchased by students. Solutions to Assignment Questions are available only in the Instructors Manual.

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Product Details

• Hardcover: 744 pages
• Publisher: Prentice Hall; 5 edition (July 3, 2002)
• Language: English
• ISBN-10: 0130090565
• ISBN-13: 978-0130090560
• Product Dimensions: 9.6 x 7.8 x 1.3 inches
• Shipping Weight: 3 pounds
• Average Customer Review: 4.0 out of 5 stars  See all reviews (23 customer reviews)
• Amazon Best Sellers Rank: #230,417 in Books (See Top 100 in Books)

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130 of 137 people found the following review helpful:

4.0 out of 5 stars A good first step into the world of Quantitative Finance, May 6, 2005

By 

Paul Thurston (New York, NY USA) - See all my reviews
(VINE VOICE)    (REAL NAME)   

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This review is from: Options, Futures, and Other Derivatives (5th Edition) (Hardcover)

The author has written a nice, lively elementary text on mathematical finance. This book can serve as a excellent launching point into the topic. For the next step in the reader's development, I recommend the very good intermediate level treatment by Bjork in Arbitrage Theory in Continuous Time. As a capstone for advanced study, I recommend the advanced treatment of Musiela and Rutkowski's Martingale Methods in Financial Modelling.

Hull starts out with several chapters on the basics of the derivative contracts in his study. The contracts introduced are forward and futures contracts, interest rate swaps, and equity options. The basic definitions of each contingency contract is given, as well as characteristics of the markets where these contracts trade. Some basic trading strategies are also studied.

The study of the option pricing model problem begins in earnest in Chapter 10. The section on one-step binomial tree model leads to a very intuitive description of risk-neutral valuation.

Chapter 11 introduces continuous time stochastic processes in a very intuitive setting. To avoid the hard-core Ito calculus, the author motivates the stochastic differential by considering difference equations. This is a nice technique and makes the material accessible to the beginner. The next highlight is a statement of Ito's lemma. This is not given in full generality, but only stated precisely as needed for Black-Scholes calculations. The appendix gives an intuitive motivation for Ito's lemma based on the multi-dimensional Taylor's formula.
This is a nice illustration as Taylor's formula is indeed a component of the formal semi-martingale based proof of Ito's rule. See for example Oksendal Stochastic Differential Equations: An Introduction with Applications Chapter 4, Karatzas & Shreve Brownian Motion and Stochastic Calculus Chapter 3, or Rogers and Williams Diffusions, Markov Processes and Martingales: Volume 2, Itô Calculus.

Chapter 12 is devoted to the Black-Scholes-Merton theory of option pricing. The famous Black-Scholes PDE is derived via Ito's rule and application of a delta hedge. The author doesn't directly solve this PDE (via the standard application of the Feyman-Kac formula). Instead a nice proof of the option pricing formula is established in the appendix based on a simple log-normal distribution argument.

Chapter 13 discusses option pricing in for other contingency contracts. In Chapter 14, we return to equity options by studying the Greek letters. The reader discovers the Greek letters can be thought of as coefficients of the Black-Scholes PDE and learns some elementary hedging techniques.

Chapter 15 discusses implied volatility and volatility smiles. It is here that the astute reader gets his first indication that the Black-Scholes theory for option pricing may not be as robust or "true to market" as the reader may have been lead to believe. (The folks at Long-Term Capital Management learned this hard lesson rather publicly.)

A survey of topics of interest follows in the next handful of chapters. The material on value at risk, the GARCH volatility model and exotic options is somewhat superficial. The careless reader will come away feeling he knows quite a bit more than he really does.

Martingale theory is touched on in 21 and the Girsanov Theorem is alluded to, but these topics are really too complex and require too many prerequisites for proper treatment in the context. A general multi-variate version of Ito's Rule is stated in the appendix of this chapter.

The next section of the book deals with term-structure models and their applications. One-factor models are discussed along with the various limitations of each of these models. This gives a nice historical treatment. The Heath-Jarrow-Morton and Libor Market Model k-factor term-structure frameworks are introduced. Without the supporting martingale theory, the analysis of these models presented here is very limited.

The last several chapters of the text are very survey-like and breezily touch on topics such as credit risk, credit derivatives and energy derivatives. There isn't a lot of theory in these chapters at all, but at least the reader is made aware of the existence of these kinds of contingencies.

The book wraps up with a cautionary chapter in the form of lessons learned. The unwary reader might see all of the derivative-related train wrecks and say to himself "well, that won't be me". The problem is that it really might be you if you truly (and foolishly) still believe the equity prices always follow geometric Brownian motion. See Lo & MacKinlay A Non-Random Walk Down Wall Street for an excellent exposition into the limitations of the basic assumptions underpinning the Black-Scholes-Merton theory.

If nothing else, Hull's last chapter should convince you that maybe this isn't the only book you'll ever want to read in your study of mathematical finance.

8 of 10 people found the following review helpful:

5.0 out of 5 stars Probably the best for practitioners; useful for theory, October 5, 2002

By 

Vladimir S Novakovski - See all my reviews

This review is from: Options, Futures, and Other Derivatives (5th Edition) (Hardcover)

This book is a solid introduction to pricing derivatives and explains in lucid detail all the techniques you need to get up and running with numerical valuation. It is aimed, I would say, at advanced MBA students and practitioners on the job already. That is to say, Hull doesn't spend too much time on theory (for instance, his explanation of HJM summarizes several of their papers and a number of preludes into a few paragraphs).

I would also say that the more theory-oriented reader would benefit from reading Hull. It provides a fresh picture, distinct from the essential theoretical foundations of Merton, Duffie, Campbell, and Cochrane. Thus, to learn CAPM, state prices, or portfolio choice, look elsewhere; to learn how to price derivatives in practice, this is your best bet.

7 of 9 people found the following review helpful:

5.0 out of 5 stars Very useful manual for practitioners, June 5, 2004

By 

kevin wang (Boston) - See all my reviews

This review is from: Options, Futures, and Other Derivatives (5th Edition) (Hardcover)

This is a great manual for market practitioners. It does not use detailed math, does not go into issues of corporate finance. But it is very easy to follow and it is "complete". More than that, the book is to the point and very clear. Market professionals will find the examples spread around the book very useful for their daily work. The surprising new book by Nefci which I just got, but did not have time to study in detail, seem to provide all the missing links.

I had used an earlier edition of Hull, and it appears that John Hull adds all the relevant material needed for market finance with each new edition. In fact I have purchased several books on Mathematical Finance and Derivatives but few of them remain on my desk for future consultation.