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Fo= So e^(R-Q)T
𝑅𝑐
𝑅𝑚
𝑅𝑐 = 𝑀𝐿𝑛(1 + ( 𝑚 )) 𝑅𝑚 = 𝑚(𝑒 𝑚 − 1)
Bond Pricing
V is cash-flow/ dividend payment, R is interest rate/ zero rate, T is time to maturity of payment (example 0.5 and 1 for 6
months and a year), F is Face value of bond.
Par yield
𝐶 −𝑂𝐼𝑆𝑅𝐴𝑇𝐸∗𝑇 𝑐 𝑐
𝑀
𝑒 + 𝑚 𝑒 −𝑂𝐼𝑆𝑅𝐴𝑇𝐸∗𝑇 + (𝐹𝑎𝑐𝑒𝑉𝑎𝑙𝑢𝑒 + 𝑀) 𝑒 −𝑜𝑖𝑠𝑟𝑎𝑡𝑒∗𝑇 =FACE VALUE OF BOND
(𝐵𝑜𝑛𝑑 − 𝐵𝑜𝑛𝑑𝐷)𝑀
𝐶=
𝐴
BOOTSTRAP METHOD
Chapter 3 Formulas
Long hedge
Cost of Asset: S2
Gain on Futures: F2-F1 (F2 is future price at purchase F1 is future price at time hedge is set up S2 is asset price at time
purchased B2 is basis at time of purchase)
Short Hedge
Price of asset: S2
After tailing adjustment to allow for daily settlement of futures NF= H^Va/Vf
Changing Beta
(𝛽−𝛽∗)𝑉𝑎
or 𝑁𝑓 ∗ 𝑉𝑓 = −(𝛽𝐹 − 𝛽)𝑃 P= portfolio beta For sell (switch to (B-BF if buy)
𝑉𝑓
Chapter 5 formulas
Present value of s forward position
NF is number of forwards
The price of a future with two effective rates and (possible two currencies)
(1+𝑅𝑑)𝑇
𝐹 = (1+𝑅𝑠)^𝑇 (S) S=spot price
𝐹 = 𝑆(1 + 𝑟)𝑇
𝐹 = 𝑆𝑒 𝑅𝑇
𝐹 = (𝑆 − 𝐼)𝑒 𝑅𝑇
𝑅 + 𝐵𝑒𝑡𝑎 ∗ (𝑀𝑅 − 𝑅)
Chapter 7
Valuation of a swap
Time (years) Fixed cash flow Floating cash Net cash flow Discount rate Present Value
Is negative flow (positive) of net cashflow
Floating cash flow = LIBOR*Face value*payment Frequency (payment frequency semi annual =0.5 Annual= 1 quarterly=0.25)
M2 and M1 are the durations of each rate (ex; 3 month and 1 month= 3-1)
Note ** T is time of payment (ex; 3 month swap option with payment every 2 months (payment in (1/12) and (3/12)