Fundamentals of Futures and Options Markets

Citation

Hull, J. C. (2022). Fundamentals of Futures and Options Markets (9th ed., Global Edition). Pearson.

Chapter Summary

The ninth edition has twenty-five chapters. According to the publisher, it covers much of the material of Hull's longer Options, Futures, and Other Derivatives in simpler language and without calculus. Chapters 1–8 deal with futures, forwards, interest rates and swaps; Chapters 9–12 introduce options and binomial trees; Chapters 13–25 cover option pricing, risk management and more specialised products. The publisher notes that a course can stop after Chapter 12 or take Chapters 13–25 in various sequences, and that each chapter from Chapter 18 onwards can be taught as a self-contained unit.

Chapter 1: Introduction

An overview of derivatives markets and the main types of contract, introducing futures, forwards and options and the uses of derivatives.

Chapters 2–3: Futures Markets and Central Counterparties; Hedging Strategies Using Futures

How futures markets operate, including the role of central counterparties in clearing, followed by the use of futures for hedging. The publisher notes expanded discussion in this edition of how daily settlement affects hedging with futures and of new regulations on clearing and trading over-the-counter derivatives.

Chapters 4–6: Interest Rates; Determination of Forward and Futures Prices; Interest Rate Futures

Interest-rate measurement and the zero curve, the pricing of forward and futures contracts, and interest rate futures. The edition revises the first seven chapters to reflect the market's move to discounting with the overnight indexed swap (OIS) curve.

Chapter 7: Swaps

Interest rate and other swaps. The publisher describes this chapter as substantially reworked: swaps and forward rate agreements are valued using forward rates for the payment rate (usually LIBOR) and the OIS zero curve for discounting, rather than LIBOR discounting.

Chapter 8: Securitization and the Credit Crisis of 2007

Securitization and its role in the credit crisis that began in 2007.

Chapters 9–11: Mechanics of Options Markets; Properties of Stock Options; Trading Strategies Involving Options

How options markets work, the properties of stock options, and trading strategies that combine options with each other or with the underlying asset.

Chapter 12: Introduction to Binomial Trees

The binomial tree method for valuing options, the point at which the publisher suggests a shorter course can end.

Chapters 13–16: Valuing Stock Options: The Black–Scholes–Merton Model; Employee Stock Options; Options on Stock Indices and Currencies; Futures Options and Black's Model

The Black–Scholes–Merton model and its application to employee stock options, options on indices and currencies, and options on futures using Black's model.

Chapters 17–19: The Greek Letters; Binomial Trees in Practice; Volatility Smiles

Measuring and hedging option risk with the Greek letters (whose calculation and use this edition covers in more detail), the practical use of binomial trees, and the volatility smiles seen in option prices.

Chapters 20–25: Value at Risk and Expected Shortfall; Interest Rate Options; Exotic Options and Other Nonstandard Products; Credit Derivatives; Weather, Energy, and Insurance Derivatives; Derivatives Mishaps and What We Can Learn from Them

Self-contained chapters on risk measures (with expanded treatment of expected shortfall), interest rate options, exotic options, credit derivatives, weather, energy and insurance derivatives, and lessons from losses on derivatives.

Key Concepts

Chapters 1–8: Forwards, futures and swaps

• Forward and futures contracts: agreements to buy or sell an asset at a future date for a price set today, with futures traded on exchanges and settled daily.
• Hedging with futures: using futures positions to offset price risk.
• Zero curve and OIS discounting: the term structure of risk-free rates used to discount cash flows.
• Swaps: exchanges of cash-flow streams, such as fixed for floating interest payments.

Chapters 9–16: Options and their valuation

• Calls and puts: rights to buy or sell an asset at a set price.
• Binomial trees: valuing options by modelling the asset price as moving up or down in discrete steps.
• Black–Scholes–Merton model: the standard formula for pricing European options, extended by Black's model to options on futures.

Chapters 17–25: Risk management and specialised products

• The Greek letters: sensitivities of an option's value to the underlying price, time, volatility and interest rates, used for hedging.
• Volatility smile: the pattern of implied volatilities across strike prices.
• Value at risk and expected shortfall: measures of potential losses on a portfolio.
• Credit derivatives: contracts whose payoffs depend on the creditworthiness of a borrower.

Critical Analysis

Strengths

• Accessible without calculus. The publisher states that the book simplifies the language of Options, Futures, and Other Derivatives for a less mathematically sophisticated audience and omits calculus completely, making the core of derivatives pricing available to business and economics students.
• Flexible structure. The first twelve chapters form a complete short course ending with binomial trees, and the later chapters can be taken in different orders, with Chapters 18–25 designed as independent units. Instructors and self-learners can choose what fits.
• Market practice and regulation. The edition reflects the move to OIS discounting, new rules on clearing and trading over-the-counter derivatives and the growing importance of expected shortfall, and includes chapters on securitization and the 2007 crisis and on derivatives mishaps.
• Built-in checking. The publisher lists end-of-chapter quiz questions with answers at the back and practice questions throughout the text, so students can test themselves.

Limitations

• LIBOR-era content. The ninth edition still uses LIBOR as the usual payment rate for swaps and forward rate agreements. LIBOR has since been replaced by alternative reference rates, so the interest rate chapters need supplementing with current market conventions.
• Limited mathematical depth by design. Without calculus, the Black–Scholes–Merton model and the later topics are explained and applied rather than derived. Students heading for quantitative finance will need the longer Hull text and then the stochastic-calculus books in this course.
• A reissued edition. The 2022 Global Edition carries the ninth edition, whose US printing appeared in 2016, so examples and market data reflect that period.

Where It Fits in the Course

This is the entry point to the asset pricing and derivatives list. Its natural next step is Hull's own Options, Futures, and Other Derivatives, which covers the same ground with more mathematics and more topics; students who later need the longer book will find the approach familiar.

Almost every other book in the list is far more mathematical. Tomas Björk's Arbitrage Theory in Continuous Time, Lamberton and Lapeyre's Introduction to Stochastic Calculus Applied to Finance, Bingham and Kiesel's Risk-Neutral Valuation and Musiela and Rutkowski's Martingale Methods in Financial Modelling develop the continuous-time theory behind the Black–Scholes–Merton model. Tuckman's Fixed Income Securities, Veronesi's and Sundaresan's fixed-income texts and Rebonato's book on the LIBOR market model extend Chapters 4–7 and 21; Duffie and Singleton's Credit Risk extends Chapter 23; Glasserman's Monte Carlo Methods in Financial Engineering and Platen and Bruti-Liberati's numerical text treat computational methods. Hull's book gives the institutional and intuitive background that makes these texts easier to approach.

How to Use This Book

The book suits undergraduates and master's students in business, economics and finance who have taken an introductory finance course and are comfortable with algebra, logarithms and basic probability.

A suggested plan:

• Core short course (Chapters 1–12): futures, hedging, interest rates, forward pricing, swaps, options and binomial trees. Read Chapters 4–5 carefully; the pricing arguments there recur throughout the book.
• Option pricing and risk (Chapters 13, 17 and 19–20): the Black–Scholes–Merton model, the Greek letters, volatility smiles and risk measures form the most useful extension for most students.
• Electives (Chapters 14–16, 18 and 21–25): choose according to interest; since Chapters 18–25 are self-contained, they can be read in any order.

Work the practice questions in each chapter and the end-of-chapter quiz before checking the answers at the back. Building the binomial trees and Black–Scholes–Merton calculations in a spreadsheet is a good way to make the methods concrete. For interest rate material, read alongside a current source on the transition from LIBOR to alternative reference rates.