Typos and errors in Derivatives Markets, Second Edition, first printing

For 3rd Edition errata, and up-to-date information about my R package, derivmkts, please see this page

Errata in:

If you have this printing, you should check errata for later printings as well.

Text Errata

232nd line: The current price is 1094.83, not 1094.44.
46, Fig 2.13The bottom value on the y-axis should be -15,000. Also, it would be clearer for the x-axis label to read "House price, end of period ($)"
511st line: should say "after 5 1/2 years, the buyer has lost interest with a present value of"
781st line after 3.4: should say "collared stock" rather than "collar"
961st line: Figure 4.4 shows the profit, not the payoff.
1132nd line: "To offset the higher premium, we could sell less than one call". ("Sell" replaces "buy")
132Last sentence, end of 2nd paragraph, should say "exp(delta*T) times as many shares as we had initially."
138Last line of penultimate paragraph: the example assumes that the transaction is cash-settled, not settled by delivery (in which case there would be a bid-ask spread on the stock).
139Delete the sentence below line below (5.11)
145First line in third paragraph, "significantly" is misspelled.
186In Example 6.2, 5th line, 94.56 should be replaced by 96.13.
198Last line: "stock hedge" should be "stack hedge".
200The definition of "Heating Degree Day" should be "the maximum of zero and the difference between 65 degrees farenheit and the average daily temperature."
216End of line above Example 7.3: "on day t" should be "on day t+s".
218On the third line from the top of the page, "borrowing rate" should be "lending rate".
218Second bullet on the page, replace "prepaid forward" with "bond maturing at t2,"
221, fn 7The expected error should be divided by 1+r_{forward}, not 1+r_{forward}^2. This changes the estimate of convexity bias to 614 instead of 603.
226, Ex. 7.5In the displayed equation, the right-hand side should be "3.000" instead of "-3.000".
242Fifth line after "Bonds" head, "multiplying" is misspelled.
259Ninth line below Table 8.4: "swap payments in June, September, and December (the months in which the quarterly rate prevailing over the next 3 months is known" should be "swap payments in September, December, and March (the months in which quarterly payments are due for a 9 month loan initiated in June)".
262In equation 8.4, the limit of the summation should be "n" rather than "T".
264In the box about the P&G swap, bottom of the first column: the spread evaluated to -.17, which is -17 percent, not basis points.
283 Second line below eq 9.2: "life of the stock" should read "life of the option"
294 Equation (9.11). The term on the left-hand should have "T-t" as an argument, rather than "T".
309Problems 9.17 and 9.18. Table 9.1 was updated without the problem having been updated. The appropriately revised problems are here.
316Footnote 2: the superscipt "Sh" should be a "delta h"
344The early exercise condition rK>delta S is correct only for infinitely-lived options. (The demonstration of this condition is on pp. 566-567.)
380-381 Ex 12.3The example is correct as stated, however, at the top of p. 381 there should be some discussion of the appropriate volatility being that of the prepaid forward price, S-PV(Div), rather than of S (this issue is discussed on p. 365.)
384-386Figures 12.1-4: The phrase "at-the-money" should be deleted from the figure captions.
394, eq. 12.12In the denominator, the absolute value of omega should be used (as in equation 12.9). The equation is correct if omega>0 (a call) and the Sharpe ratio reverses sign if omega<0.
395The discussion uses omega_i to mean both quantity and portfolio percentage. A corrected discussion is here
431 Equation (13.11) applies for a delta-hedged long call. To be consistent with the text there should be a minus sign in fornt of equation (13.11)
431Footnote 5: "Variance" should be "standard deviation".
435, Figure 13.4The text should make clear that the figure is drawn assuming an option on one share, unlike Figure 13.2, which is drawn assuming an option on 100 shares.
456Example 14.2: There are two corrections.
  1. The CallOnPut calculation should use the prepaid forward price ($95.0987) as the stock price, instead of $100. This gives a compound option value of $1.7552. The correct value for the American option is therefore $13.5325.
  2. The Black-Scholes value should be $11.764.
For more details, see an expanded discussion of this section and example 14.2.
459First equation on page: K_t should be K_T
459Equation 14.16: On the left hand side, "r" should be "delta_K" and "delta" should be "delta_S"
466Appendix 14.A: The text should say that 1) The pricing formulas for barrier options are covered in Section 22.3 and 2) All of the options discussed in this chapter have pricing formulas (and VBA code) available in the spreadsheet accompanying the book.
466In the last line, the expression for sigma^{**} should not have a sqrt(T) in it.
493Figure 15.1 "prepair" should be "prepaid"
502Problem 15.22: the bullet list should be enumerated (i.e., as parts "a", "b", and "c")
5061st paragraph, 2nd line: defaultable debt is equivalent to owning a default-free bond and writing a put option on the assets of the firm.
508Fourth line of text, "of the equity increases by $0.735 and ..."
518Figure 16.4, Panel F. The value 5361.58 should be italicized since the firm calls the bond.
560The formula for "sigma hat squared sub t" right below equation (17.3) should not have an H or H^2 in it. (By analogy, if you were pricing an option to exchange one share of S for k shares of Q, the option price would depend on the volatility of the return difference between S and Q, and not depend on k.)
594Figure 18.3. The gray line should be labeled "N(0,1.5)" and the black line should be labeled "N(0,1)".
600In the fifth and sixth lines below the heading "Lognormal Confidence Intervals", the inequalities are reversed. S_L is the lower bound and S_U the upper bound, so it should read "Prob(S_t < S_L)" and "Prob(S_t > S_U)".
612Figure 18.6. In the bottom two panels, the plotted distribution is normal with mean 3 and standard deviation 5, not standard normal.
618The lower subscript on the summation in the middle of the page should be zero instead of 1.
655Equation (20.9) is an Ornstein-Uhlenbeck process even when alpha is not equal to zero.
657Last line: The covariance is rho*dt. The correlation is rho.
661Sixth line: it should read E[Z(t+s)|Z(t)]=Z(t)
662Footnote 9, last equation. On the right-hand side, "Z" should be "Z(t)"
757, Fig 23.6The legends are reversed. The dashed line is realized volatility and the solid line is GARCH(1,1).
779Sixth line from bottom: Duration is defined in Section 7.3, not 7.8.
780-788The corrected pages are here. The discussion of short-rate models needs a few corrections. Equations 24.1 and 24.2 should have different signs on the dZ term ((one positive, one negative), the reason being that interest rates and bond prices are inversely related. Suppose 24.1 is -qdZ (in which case 24.2 is unaltered). This alters the sign on the dZ term in equation 24.12, which makes sense: P_r is negative, and we want volatilities to be positive. So there should be a negative sign preceding this expression. The signs on the dZ terms in 24.13 and 24.14 are likewise negative. The negative sign in 24.12 switches the sign on phi in 24.18 and 24.19. This gives the same PDE as in Vasicek. With the switch in 24.18, rbar is correct in 24.26. The error affects the CIR solution. The sign on r*phi_bar in the PDE is switched, and all occurrences of a+phibar should be a-phibar.
783Equation 24.19: the dZ should have a tilde
787In the definition of A(t,T) (second displayed equation line below the line containing only "where"), the "B^2 sigma^2" term should be "B(t,T)^2 sigma^2"
787Line below equation 24.27: "variance" should be "standard deviation". Same correction on the third line above equation 24.28.
787Line above equation 24.28: "risk premium" should be "Sharpe ratio"
789Figure 24.1. In the bottom panel, the fourth tick mark should be "20", not "0".
795Example 24.3, first line: "Figure 24.2" should be "Figure 24.3"
799Table 24.2, caption: "Volatility refers to the volatility of the bond yield" (not "price").
800Fourth line: "time-t" should be "time-h".
800Fifth line: It would be clearer to say "The annualized yield of the bond is"
800Equation 24.48: The right-hand side should be divided by sqrt(h) in order to annualize the volatility. (This doesn't affect any of the calculations, since h=1 throughout the example.)
800Figure 24.4. In Period 1, at the upper node an equals sign is missing (should be R_u=R_h etc.)
804The sixth line of text should say "Both yield volatilities match ..."
805In the caplets and caps example: 1) the loan should be referred to as a 4-year loan, since (in Fig 24.9) the final payment is made four years from the initiation date. 2) the reference to "2-year caplet" and "year-2 cap payment" should be changed to "3-year caplet" and "year-3 cap payment" for consistency with the caplet definition on p. 792.
910, 912The definitions of "heating degree day" and "cooling degree day" are reversed.

Errata for web appendices

Appendix 19.A The final expression should not have "T" multiplying each term on the right-hand side.

Spreadsheet errata

Optall2.xls, CEV module In two locations in the cevcall function, there is a typo. The fragment "cevcall = s^exp(-a*t)" should read "cevcall=s*exp(-a*t)". Corrected in optall2a.xls
Optall2.xls, Vasicek pricing function The sign on the risk premium is wrong. Corrected in optall2b.xls

© Copyright 2006, Robert McDonald. You can send me mail at r-mcdonald@northwestern.edu.

Last modified: Wed Jun 15 12:18:56 CDT 2016