Derivative Instruments: A Guide to Theory and Practice Butterworth-Heinemann Finance Aims and objectives & books based on the work of financial market practitioners, and academics & presenting cutting edge research to the professional/practitioner market & combining intellectual rigour and practical application & covering the interaction between mathematical theory and financial practice & to improve portfolio performance, risk management and trading book performance & covering quantitative techniques Market Brokers/Traders; Actuaries; Consultants; Asset Managers; Fund Managers; Regulators; Central Bankers; Treasury Officials; Technical Analysts; and Academics for Masters in Finance and MBA market. Series titles Return Distributions in Finance Derivative Instruments: a guide to theory and practice Managing Downside Risk in Financial Markets: theory, practice, & implementation Economics for Financial Markets Performance Measurement in Finance: firms, funds and managers Real R&D Options Forecasting Volatility in the Financial Markets Advanced Trading Rules Advances in Portfolio Construction and Implementation Series editor Dr Stephen Satchell Dr Satchell is a Reader in Financial Econometrics at Trinity College, Cambridge; Visiting Professor at Birkbeck College, City University Business School and University of Technology, Sydney. He also works in a consultative capacity to many firms, and edits the journal Derivatives: use, trading and regulations and the Journal of Asset Management. Derivative Instruments: A Guide to Theory and Practice Brian A. Eales Moorad Choudhry OXFORD AMSTERDAM BOSTON LONDON NEW YORK PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO Butterworth-Heinemann An imprint of Elsevier Science Linacre House, Jordan Hill, Oxford OX2 8DP 200 Wheeler Road, Burlington MA 01803 First published 2003 Copyright # 2003, Brian A. Eales and Moorad Choudhry. All rights reserved The right of Brian A. Eales and Moorad Choudhry to be identified as the authors of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1T 4LP. Applications for the copyright holder's written permission to reproduce any part of this publication should be addressed to the publisher Permissions may be sought directly from Elsevier's Science and Technology Rights Department in Oxford, UK: phone: (+44) (0) 1865 843830; fax: (+44) (0) 1865 853333; e-mail: