Options, Futures, and Other Derivatives

Citation

Hull, J. C. (2021). Options, Futures, and Other Derivatives (11th ed.). Pearson.

Chapter Summary

The 11th edition (published February 2021) has thirty-seven chapters, plus lists of the book's Business Snapshots and Technical Notes and end matter comprising a glossary, a description of the DerivaGem software, a list of major exchanges trading futures and options, and tables of the cumulative normal distribution. Pearson describes the book as bridging theory and practice: by the end, readers should understand how options and futures markets work, how to price and hedge derivatives, and how the models used on trading floors and in risk management are applied. The Global Edition's description adds that the text uses simple language and clear explanations because mathematics is a key challenge for many students of the subject. This edition revises tables, charts, examples and data for current market conditions and covers recent regulation and trends, including overnight indexed swaps and the valuation of commodity derivatives.

Chapters 1–3: Introduction; Futures Markets and Central Counterparties; Hedging Strategies Using Futures

An introduction to derivatives markets and their participants, the mechanics of futures markets including the role of central counterparties in clearing, and the use of futures for hedging.

Chapters 4–7: Interest Rates; Determination of Forward and Futures Prices; Interest Rate Futures; Swaps

The basic valuation tools: interest rate measurement, the pricing of forwards and futures, interest rate futures and swaps.

Chapters 8–9: Securitization and the Financial Crisis of 2007–8; XVAs

Two chapters on the institutional context: securitization and its role in the 2007–8 crisis, and XVAs, the valuation adjustments applied to over-the-counter derivatives for credit, funding and related costs.

Chapters 10–12: Mechanics of Options Markets; Properties of Stock Options; Trading Strategies Involving Options

Options are introduced through how options markets work, the properties of option prices that follow from no-arbitrage arguments alone, and trading strategies that combine options and the underlying asset.

Chapters 13–15: Binomial Trees; Wiener Processes and Itô's Lemma; The Black–Scholes–Merton Model

The core of option pricing. Binomial trees give the first pricing model; Wiener processes and Itô's lemma supply the stochastic calculus; the Black–Scholes–Merton model follows.

Chapters 16–18: Employee Stock Options; Options on Stock Indices and Currencies; Futures Options and Black's Model

Applications and extensions of the basic model: employee stock options, options on indices and currencies, and options on futures priced with Black's model.

Chapters 19–20: The Greek Letters; Volatility Smiles and Volatility Surfaces

Hedging and the limits of the model: the Greek letters that measure an option's sensitivity to its inputs, and the volatility smiles and surfaces observed in market prices.

Chapters 21–23: Basic Numerical Procedures; Value at Risk and Expected Shortfall; Estimating Volatilities and Correlations

Numerical methods for pricing when formulas are not available, followed by risk measurement: value at risk and expected shortfall, and the estimation of volatilities and correlations that those measures require.

Chapters 24–26: Credit Risk; Credit Derivatives; Exotic Options

Credit risk and the derivatives used to trade and hedge it, and the wide range of exotic options beyond standard calls and puts.

Chapters 27–28: More on Models and Numerical Procedures; Martingales and Measures

A more advanced block: further models and numerical methods, and the theory of martingales and changes of measure that underlies risk-neutral valuation.

Chapters 29–34: Interest Rate Derivatives: The Standard Market Models; Convexity, Timing, and Quanto Adjustments; Equilibrium Models of the Short Rate; No-Arbitrage Models of the Short Rate; Modeling Forward Rates; Swaps Revisited

Six chapters on interest rate derivatives: the market-standard models, the adjustments needed when payoffs are not of standard form, equilibrium and no-arbitrage models of the short rate, models of forward rates, and a return to swaps with more complex structures.

Chapters 35–37: Energy and Commodity Derivatives; Real Options; Derivatives Mishaps and What We Can Learn from Them

The book closes with energy and commodity derivatives, real options (applying option thinking to investment decisions), and lessons drawn from derivatives losses.

Key Concepts

Chapters 1–9: Forwards, futures, swaps and context

• Forward and futures prices: prices for future delivery determined by no-arbitrage arguments.
• Central counterparties: clearing houses that stand between the parties to a trade.
• Swaps: agreements to exchange cash flows, such as fixed for floating interest payments.
• XVAs: valuation adjustments to derivatives for credit, funding and similar costs.

Chapters 10–20: Options

• Binomial trees: a discrete model of asset price movements used to price options.
• Itô's lemma: the rule for how a function of a stochastic variable changes over time.
• Black–Scholes–Merton model: the continuous-time model and formulas for pricing European options.
• Greek letters: sensitivities of an option's value (delta, gamma and others) used for hedging.
• Volatility smiles and surfaces: the pattern of implied volatilities across strikes and maturities.

Chapters 21–28: Numerical methods, risk and advanced models

• Value at risk and expected shortfall: measures of potential portfolio losses.
• Credit derivatives: contracts whose payoffs depend on the creditworthiness of a reference entity.
• Exotic options: options with non-standard payoffs or features.
• Martingales and measures: the mathematical basis of risk-neutral valuation.

Chapters 29–37: Interest rates, commodities and applications

• Short-rate models: equilibrium and no-arbitrage models of how the short-term interest rate evolves.
• Forward-rate models: models of the whole term structure of forward rates.
• Real options: valuing flexibility in investment decisions with option-pricing tools.

Critical Analysis

Strengths

• Theory and practice together. Pearson stresses that the book bridges theory and practice, from how markets work to the models used on trading floors and in risk management. The structure reflects this: institutional chapters (central counterparties, securitization, XVAs, employee stock options) sit alongside the pricing theory.
• Gradual mathematics. The Global Edition's description emphasizes plain language for students who find the mathematics hard. The order of the contents bears this out: binomial trees (Chapter 13) come before Wiener processes and Itô's lemma (Chapter 14) and the Black–Scholes–Merton model (Chapter 15), and martingales and measures are deferred to Chapter 28.
• Breadth. Thirty-seven chapters cover forwards, futures, swaps, options, credit, interest rate models, commodities and real options, together with value at risk and expected shortfall, so the book serves both a first derivatives course and later topics.
• Supporting material. Business Snapshots and Technical Notes are listed in the front matter, and the end matter includes a glossary, tables of the normal distribution and a description of the DerivaGem software that accompanies the book.

Limitations

• Very long. Thirty-seven chapters are far more than one course can cover; instructors and readers must select.
• Rigour is not the aim. The publisher positions the book for business, economics and financial engineering students and stresses simple language for readers who find the mathematics hard; readers who need a rigorous development of stochastic calculus and martingale pricing must turn to a mathematical finance text.
• Market details date. The book's value depends partly on current market practice; Pearson notes that each edition revises data and regulatory coverage, so older editions should be used with care, especially for interest-rate benchmarks and regulation.

Where It Fits in the Course

Hull is the course's bridge between an introductory derivatives course and the graduate mathematical finance books. Hull's own Fundamentals of Futures and Options Markets covers much of the same ground in simpler language without calculus and is the better choice for a first course; students moving on from it will find the same author's approach here, extended to stochastic calculus, credit and interest rate models.

Most of the remaining books are graduate-level and more specialized. 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 supply the rigorous theory behind Chapters 13–15 and 28. For interest rates, Tuckman and Serrat's Fixed Income Securities, Veronesi's Fixed Income Securities, Sundaresan's Fixed Income Markets and Their Derivatives and Rebonato's book on the LIBOR market model extend Chapters 4–7 and 29–34. Duffie and Singleton's Credit Risk extends Chapters 24–25, while Glasserman's Monte Carlo Methods in Financial Engineering and Platen and Bruti-Liberati's book on numerical solution of SDEs with jumps extend Chapters 21 and 27.

How to Use This Book

The publisher names students of business, economics, financial engineering and mathematics as its readers. It suits those who have taken an introductory finance course and know basic probability, statistics and calculus.

• Core sequence: Chapters 1–7 (futures, forwards, interest rates, swaps), then 10–15 (options through Black–Scholes–Merton), then 19–20 (Greeks and volatility smiles). This is a full first course.
• Risk management emphasis: add Chapters 21–25 (numerical procedures, value at risk, volatility estimation, credit).
• Context: Chapters 8–9 on securitization and XVAs and Chapter 37 on derivatives mishaps can be read independently and suit discussion classes.
• Advanced course: Chapters 26–34 for exotic options, martingales, and interest rate models, followed by 35–36 on commodities and real options as needed.

Use the DerivaGem software to check calculations and to see how results change when inputs change. Work numerical problems by hand first, then confirm with software. Read the Business Snapshots for the practical context of each topic.