Financial Mathematics - Formulary

Allowed for use at exams

PART I PART II

Exponential law Relationship among quantities in a general financial

Relationships between the annual quantities of the exponential law
law: For every t ≤ T ≤ s,
1 1
1 
1
 s−t 
1
 s−T
v= , δ = log(1 + i) , d=1−v . i(t, s) = − 1 , i(t, T, s) = −1 ,
1+i v(t, s) v(t, T, s)
log v(t, s) log v(t, T, s)
Discount factor h(t, s) = − , h(t, T, s) = − ,
s−t s−T
i annual compound interest rate, t and s in years Rs Rs
v(t, s) = e− t δ(t,u) du , v(t, T, s) = e− T δ(t,u) du ,
v(t, s) = (1 + i)−(s−t)
∂
δ(t, s) = − log v(t, s) .
∂s
Equivalent rates
q is the exchange factor in the time unit of measures Commercial discount law
1 Fixed k > 0, for every t ≤ s with s − t < 1/k,
i0 = (1 + i)1/q − 1 , δ0 = δ ,
q v(t, s) = 1 − (s − t)k
v 0 = v 1/q , d0 = 1 − (1 − d)1/q .
Duration of an annuity under a flat term structure
Linear law Given an immediate annuity r with annual constant
Discount factor instalments, duration m ≥ 0 and an exponential law:
i annual simple interest rate, t and s in years dm i 1+i m
D(0, r) = = − ,
v(t, s) = [1 + (s − t)i]−1 am i i (1 + i)m − 1
1 − vm
 
v
dm i = − mv m .
1−v 1−v
Equivalent interest rates
q is the exchange factor in the unit of measure of time:
Swap Interest rate
1 A swap interest rate for m years with annual fixed rate:
i0 = i .
q
1 − v(t, t + m)
isw (t; m) = Pm .
k=1 v(t, t + k)
Annuties
Present value of an annuity and of a perpetuity with constant
instalments R = 1 according to the exponential law with
annual interest rate i > 0. n ≥ 0 indicates the duration of PART III
the annuity.
1 − (1 + i)−n 1 Portfolio Allocation
an i = , a∞ i = ,
i i Minimum variance allocation of a portfolio composed by two
n
1 − (1 − d) 1 assets.
ä n i = (1+i)a n i = , ä ∞ i = (1+i)a ∞ i = . √
d d V2 − ρ V1 V2
w1∗ = √ .
V1 + V2 − 2ρ V1 V2
Amortizations w2∗ = 1 − w1∗ .
Amortization at periodic compound interest rate i > 0 of
a loan S > 0, duration n periods. For each k, Rk is the
instalment paid in that period, Ck the amortization quota,
Ik the interest quota, Mk = Dk the residual debt value.
French amortization (Rk = R constant)
S
R= , Ck = Rv n−k+1 ,
an i
Ik = R 1 − v n−k+1 ,


Mk = Dk = Ra n−k i .

Italian amortization (Ck = C constant)

S
Rk = C[1 + i(n − k + 1)] , C=
,
n
Ik = iC(n − k + 1) , Mk = Dk = C(n − k) .
v. 6 aprile 2017