Chap 5
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1. The document discusses the determination of forward and futures prices for different types of assets, including consumption assets like oil and investment assets like gold. It presents the key formulas for relating the forward or futures price to the expected future spot price based on factors like interest rates, storage costs, and yield. 2. Short selling is discussed as selling securities you do not own by borrowing them from another client and later replacing them. 3. Examples are provided of using the formulas to check for arbitrage opportunities between spot and forward gold prices under different interest rate scenarios.
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Chap 5
1. The document discusses the determination of forward and futures prices for different types of assets, including consumption assets like oil and investment assets like gold. It presents the key formulas for relating the forward or futures price to the expected future spot price based on factors like interest rates, storage costs, and yield.
2. Short selling is discussed as selling securities you do not own by borrowing them from another client and later replacing them.
3. Examples are provided for arbitrage opportunities between spot and forward gold prices under different interest rate scenarios.
Chap 14
1. European options on stocks paying dividends can be valued by reducing the stock price by the dividend yield and treating it as if there is no dividend.
2. Index options, currency options, and futures options can be valued using the same approach by setting the dividend yield equal to the average index dividend yield, foreign interest rate, and domestic interest rate respectively.
3. Black's formula, similar to the formula for options on stocks paying dividends, can be used to value European options on futures contracts by treating the futures price as a stock with a dividend yield equal to the domestic interest rate.
Chapter 1
1. A derivative is a financial instrument whose value is based on an underlying asset such as stocks, currencies, commodities, bonds, or market indexes. Examples are futures, forwards, options and swaps.
2. Derivatives play a key role in transferring risk between parties in the economy. They are traded both on exchanges as well as over-the-counter between banks and other institutions.
3. Derivatives are used to hedge risks, speculate, engage in arbitrage, or change the nature of investments without selling and rebuying assets.
Chapter 5 pricing
This document discusses the determination of forward and futures prices. It introduces the concepts of investment assets versus consumption assets and explains how short selling works. It then provides the basic formulas for relating the forward or futures price to the spot price based on interest rates. The formulas are adapted for assets that pay income or have storage costs. Arbitrage opportunities that can arise when the theoretical relationship between spot and forward/futures prices does not hold are also discussed.
INV3703: Chapter 3
An overview of Chance (2003) 'Analysis of derivatives for the CFA program' the INV3703 prescribed textbook.
Chap 11
The document discusses binomial option pricing models. It introduces a simple binomial model to value a call option on a stock priced at $20 that can be $22 or $18 in 3 months. It sets up a riskless portfolio and uses it to derive the option price of $0.633. The document then generalizes the model and introduces risk-neutral valuation, where the expected return on the stock equals the risk-free rate. It revisits the example and values the option at $0.633 using risk-neutral probabilities.
INV3703: Chapter 1
An overview of Chance (2003) 'Analysis of derivatives for the CFA program' the INV3703 prescribed textbook.
Chap 13
The document summarizes the Black-Scholes-Merton model for pricing options. It describes the key assumptions of the model including that stock prices follow a lognormal distribution and volatility is constant. It then outlines the derivation of the Black-Scholes partial differential equation and how it can be solved to price options using no-arbitrage principles. Risk-neutral valuation is introduced as an application of this framework to allow pricing based on the current stock price and risk-free rate rather than expected returns.
Recommended
Chap 5
1. The document discusses the determination of forward and futures prices for different types of assets, including consumption assets like oil and investment assets like gold. It presents the key formulas for relating the forward or futures price to the expected future spot price based on factors like interest rates, storage costs, and yield.
2. Short selling is discussed as selling securities you do not own by borrowing them from another client and later replacing them.
3. Examples are provided for arbitrage opportunities between spot and forward gold prices under different interest rate scenarios.
Chap 14
1. European options on stocks paying dividends can be valued by reducing the stock price by the dividend yield and treating it as if there is no dividend.
2. Index options, currency options, and futures options can be valued using the same approach by setting the dividend yield equal to the average index dividend yield, foreign interest rate, and domestic interest rate respectively.
3. Black's formula, similar to the formula for options on stocks paying dividends, can be used to value European options on futures contracts by treating the futures price as a stock with a dividend yield equal to the domestic interest rate.
Chapter 1
1. A derivative is a financial instrument whose value is based on an underlying asset such as stocks, currencies, commodities, bonds, or market indexes. Examples are futures, forwards, options and swaps.
2. Derivatives play a key role in transferring risk between parties in the economy. They are traded both on exchanges as well as over-the-counter between banks and other institutions.
3. Derivatives are used to hedge risks, speculate, engage in arbitrage, or change the nature of investments without selling and rebuying assets.
Chapter 5 pricing
This document discusses the determination of forward and futures prices. It introduces the concepts of investment assets versus consumption assets and explains how short selling works. It then provides the basic formulas for relating the forward or futures price to the spot price based on interest rates. The formulas are adapted for assets that pay income or have storage costs. Arbitrage opportunities that can arise when the theoretical relationship between spot and forward/futures prices does not hold are also discussed.
INV3703: Chapter 3
An overview of Chance (2003) 'Analysis of derivatives for the CFA program' the INV3703 prescribed textbook.
Chap 11
The document discusses binomial option pricing models. It introduces a simple binomial model to value a call option on a stock priced at $20 that can be $22 or $18 in 3 months. It sets up a riskless portfolio and uses it to derive the option price of $0.633. The document then generalizes the model and introduces risk-neutral valuation, where the expected return on the stock equals the risk-free rate. It revisits the example and values the option at $0.633 using risk-neutral probabilities.
INV3703: Chapter 1
An overview of Chance (2003) 'Analysis of derivatives for the CFA program' the INV3703 prescribed textbook.
Chap 13
The document summarizes the Black-Scholes-Merton model for pricing options. It describes the key assumptions of the model including that stock prices follow a lognormal distribution and volatility is constant. It then outlines the derivation of the Black-Scholes partial differential equation and how it can be solved to price options using no-arbitrage principles. Risk-neutral valuation is introduced as an application of this framework to allow pricing based on the current stock price and risk-free rate rather than expected returns.
INV3703: Chapter 2
An overview of Chance (2003) 'Analysis of derivatives for the CFA program' the INV3703 prescribed textbook.
INV3703 (Derivatives) - Discussion class slides (2012)
The slides form part of a discussion class presented to Unisa INV3703 students during September 2012. The prescribed textbook for this module is 'Analysis of Derivatives for the CFA program' by D Chance (2003)
INV3703: Chapter 5
An overview of Chance (2003) 'Analysis of derivatives for the CFA program' the INV3703 prescribed textbook.
Chap 26
The document discusses various models for pricing interest rate derivatives such as options on bonds, caps, floors, and swaptions. It describes Black's model, which assumes the underlying rate is lognormally distributed. Black's model is then applied to value European bond options, caplets, and swaptions. The relationships between these derivatives and how their values are impacted by shifts in the yield curve are also covered.
F B E559f3 B S Formula
The document summarizes the Black-Scholes formula for pricing European call options. It describes the assumptions made, such as stock prices following geometric Brownian motion and constant interest rates. It then shows how applying Ito's lemma and constructing a riskless portfolio leads to a partial differential equation. The Black-Scholes formula is obtained by solving this equation, with the option price a function of the stock price, strike price, time to maturity, interest rate and volatility. Extensions to puts, implied volatility and American options are also briefly discussed.
Chapter 12
This chapter introduces binomial trees as a method for pricing options. It presents a simple example of valuing a call option on a stock using a one-period binomial tree. It then generalizes the binomial method to multiple time periods and derives the risk-neutral valuation formula. The chapter also discusses how binomial trees can be used to value other derivative products and American options.
9 Determination of forwards and futures
The document discusses the determinants of forward and futures prices based on the cost of carry model. It states that for a carry commodity, the theoretical futures price F equals the spot price S plus the cost of carry CC minus the carry return CR. For non-carry commodities, the presence of a convenience yield can cause F to be below S + CC - CR. Several examples are provided to illustrate how cash and carry arbitrage ensures futures prices align with the cost of carry model.
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This document provides an overview of options pricing and the Black-Scholes model. It defines what an option is and the different types of options. It then explains the components of an option's price, including intrinsic value and time value. The document outlines the key factors that affect an option's price. It introduces the Black-Scholes model for pricing options and lists the assumptions and inputs required. Steps for calculating standard deviation and adjusting for dividends are also provided. Two example questions are given at the end to demonstrate using the Black-Scholes formula to price a call and put option.
Chap 12
1. The document discusses various types of stochastic processes that can be used to model stock prices, including discrete and continuous time processes.
2. It states that continuous time, continuous variable processes are most useful for valuing derivatives. These include Wiener processes and Ito processes.
3. Ito's lemma is described as a tool that allows determining the stochastic process followed by a function of a variable that itself follows a stochastic process, which is important for analyzing derivative securities.
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This document discusses currency derivatives including forward contracts, futures contracts, and options contracts. It provides explanations of how these contracts work and how they can be used for hedging currency risk or speculation based on anticipated exchange rate movements. Examples are given to illustrate forward pricing, currency futures pricing and arbitrage, and how call and put options work for currencies. Key concepts covered include forward rates, futures pricing relationships to spot rates, margin requirements, and uses of these contracts for hedging and speculation.
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This document discusses various financial modeling concepts and equations including:
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2) Perpetuities which pay a constant payment forever, and annuities which pay a set payment for a specific period of time.
3) Bond valuation using the annuity equation and present value of the principal payment.
4) The Gordon Growth Model for valuing a growing perpetuity.
5) Capital asset pricing model (CAPM) for calculating the discount rate based on beta and the risk free rate and market risk premium.
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This document provides key lessons and takeaways from an investment management course. It discusses important concepts like returns and risk, including standard deviation, Sharpe ratio, alpha, and beta. It also covers bond pricing, how various factors like coupon rate, yield to maturity, and duration impact bond prices. Additionally, it discusses bond portfolio construction and how duration and maturity impact risk.
Foreign Exchange Exposure - Meaning and Methods
Translation exposure, also known as accounting exposure, is the risk that a company's equities, assets, liabilities, or income will change value due to exchange rate fluctuations when denominated in a foreign currency. There are four main methods for translating foreign currency amounts: 1) the current/non-current method which uses the current rate for current items and historical rates for non-current items, 2) the monetary/non-monetary method which classifies items as monetary or non-monetary and uses different rates, 3) the temporal method which uses historical rates for items stated at historical cost, and 4) the current rate method which translates all items at the current spot rate. Translation exposure is a type of accounting risk
Hedging
The document discusses various hedging strategies for a company that is owed 1 million British pounds in 6 months, including:
1) Using a forward contract with a bank to lock in receiving $1,517,900
2) Using futures contracts which would net $1,517,359 after commissions
3) A money market hedge which would yield less at $1,494,751 due to higher British borrowing rates
4) Buying a put option for downside protection while allowing upside potential if the pound appreciates above the $1.53 strike price.
Chap 30
The document discusses various types of swaps beyond plain vanilla interest rate and currency swaps. It explains that more complex swaps that involve features like compounding, LIBOR-in-arrears rates, CMS rates, differentials between currencies, embedded options, or indexed/commodity prices cannot be accurately valued simply by assuming forward rates will be realized and requires additional adjustments. These adjustments include convexity adjustments, timing adjustments, quanto adjustments, and considering the embedded option features.
Chap 9
1. The document discusses key properties and relationships involving stock options, including how the price of calls and puts are affected by variables like the stock price, strike price, time to expiration, volatility, and interest rates.
2. It explores the difference between American and European options and conditions where an arbitrage opportunity may exist.
3. The document examines the potential to exercise American options early and reasons why calls on non-dividend paying stocks usually are not exercised early.
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The slides form part of a discussion class presented to Unisa INV3703 students during September 2012. The prescribed textbook for this module is 'Analysis of Derivatives for the CFA program' by D Chance (2003)
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An overview of Chance (2003) 'Analysis of derivatives for the CFA program' the INV3703 prescribed textbook.
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The document discusses various models for pricing interest rate derivatives such as options on bonds, caps, floors, and swaptions. It describes Black's model, which assumes the underlying rate is lognormally distributed. Black's model is then applied to value European bond options, caplets, and swaptions. The relationships between these derivatives and how their values are impacted by shifts in the yield curve are also covered.
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The document summarizes the Black-Scholes formula for pricing European call options. It describes the assumptions made, such as stock prices following geometric Brownian motion and constant interest rates. It then shows how applying Ito's lemma and constructing a riskless portfolio leads to a partial differential equation. The Black-Scholes formula is obtained by solving this equation, with the option price a function of the stock price, strike price, time to maturity, interest rate and volatility. Extensions to puts, implied volatility and American options are also briefly discussed.
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This chapter introduces binomial trees as a method for pricing options. It presents a simple example of valuing a call option on a stock using a one-period binomial tree. It then generalizes the binomial method to multiple time periods and derives the risk-neutral valuation formula. The chapter also discusses how binomial trees can be used to value other derivative products and American options.
9 Determination of forwards and futures
The document discusses the determinants of forward and futures prices based on the cost of carry model. It states that for a carry commodity, the theoretical futures price F equals the spot price S plus the cost of carry CC minus the carry return CR. For non-carry commodities, the presence of a convenience yield can cause F to be below S + CC - CR. Several examples are provided to illustrate how cash and carry arbitrage ensures futures prices align with the cost of carry model.
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This document provides an overview of options pricing and the Black-Scholes model. It defines what an option is and the different types of options. It then explains the components of an option's price, including intrinsic value and time value. The document outlines the key factors that affect an option's price. It introduces the Black-Scholes model for pricing options and lists the assumptions and inputs required. Steps for calculating standard deviation and adjusting for dividends are also provided. Two example questions are given at the end to demonstrate using the Black-Scholes formula to price a call and put option.
Chap 12
1. The document discusses various types of stochastic processes that can be used to model stock prices, including discrete and continuous time processes.
2. It states that continuous time, continuous variable processes are most useful for valuing derivatives. These include Wiener processes and Ito processes.
3. Ito's lemma is described as a tool that allows determining the stochastic process followed by a function of a variable that itself follows a stochastic process, which is important for analyzing derivative securities.
Options and futures markets #1 #2
This document provides an introduction to options and futures markets. It defines key terms like derivatives, underlying assets, calls, puts, premiums, strikes, expiration dates, and exercise types. Examples are given to illustrate put and call payoffs and profits at different underlying price levels. Common options strategies like bull spreads are also explained. The document covers fundamental options concepts like moneyness, break-even points, and how options values are determined.
Multiple Uneven Cashflow
This document discusses calculating the present value and future value of multiple uneven cash flows. It provides the formulas for present value (PV) and future value (FV) of uneven cash flows. As an example, it calculates the PV of a cash flow of Rs. 1000, Rs. 1500, Rs. 800 and Rs. 400 over 4 years with an interest rate of 8%. It also provides an example to calculate the FV of deposits of Rs. 500, Rs. 1000, Rs. 1500, Rs. 2000, Rs. 2500 over 5 years with an interest rate of 5%.
Currency derivatives
This document discusses currency derivatives including forward contracts, futures contracts, and options contracts. It provides examples of how forward rates are calculated based on the interest rates in different countries. It also discusses how currency futures and options work, how their prices are determined, and how they can be used by multinational corporations and speculators. The key relationships between spot, forward, and futures prices are explained.
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This document discusses currency derivatives including forward contracts, futures contracts, and options contracts. It provides explanations of how these contracts work and how they can be used for hedging currency risk or speculation based on anticipated exchange rate movements. Examples are given to illustrate forward pricing, currency futures pricing and arbitrage, and how call and put options work for currencies. Key concepts covered include forward rates, futures pricing relationships to spot rates, margin requirements, and uses of these contracts for hedging and speculation.
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The document discusses the time value of money concept and its practical applications. It introduces techniques like compound interest, future value, present value, annuities, and sinking funds. These concepts are important for understanding how money gains or loses value over time due to factors like interest rates, inflation, and investment opportunities. The key formulas for calculating future value, present value, compound interest, annuities, and sinking funds are also presented.
Mark Tuminello Future Hedging
This document discusses basis risk in hedging. Basis risk arises because the asset being hedged may differ from the asset underlying the futures contract. This can cause uncertainty about the difference between the futures price and spot price when the hedge is closed out. Effective hedging requires minimizing this basis risk. The optimal hedge ratio balances minimizing variance in the hedged position with the level of correlation between the futures price and spot price changes.
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This document discusses various financial modeling concepts and equations including:
1) Time value of money equations like present value, future value, and payment calculations.
2) Perpetuities which pay a constant payment forever, and annuities which pay a set payment for a specific period of time.
3) Bond valuation using the annuity equation and present value of the principal payment.
4) The Gordon Growth Model for valuing a growing perpetuity.
5) Capital asset pricing model (CAPM) for calculating the discount rate based on beta and the risk free rate and market risk premium.
Lessons learned investment mgt - s4
This document provides key lessons and takeaways from an investment management course. It discusses important concepts like returns and risk, including standard deviation, Sharpe ratio, alpha, and beta. It also covers bond pricing, how various factors like coupon rate, yield to maturity, and duration impact bond prices. Additionally, it discusses bond portfolio construction and how duration and maturity impact risk.
Foreign Exchange Exposure - Meaning and Methods
Translation exposure, also known as accounting exposure, is the risk that a company's equities, assets, liabilities, or income will change value due to exchange rate fluctuations when denominated in a foreign currency. There are four main methods for translating foreign currency amounts: 1) the current/non-current method which uses the current rate for current items and historical rates for non-current items, 2) the monetary/non-monetary method which classifies items as monetary or non-monetary and uses different rates, 3) the temporal method which uses historical rates for items stated at historical cost, and 4) the current rate method which translates all items at the current spot rate. Translation exposure is a type of accounting risk
Hedging
The document discusses various hedging strategies for a company that is owed 1 million British pounds in 6 months, including:
1) Using a forward contract with a bank to lock in receiving $1,517,900
2) Using futures contracts which would net $1,517,359 after commissions
3) A money market hedge which would yield less at $1,494,751 due to higher British borrowing rates
4) Buying a put option for downside protection while allowing upside potential if the pound appreciates above the $1.53 strike price.
Chap 30
The document discusses various types of swaps beyond plain vanilla interest rate and currency swaps. It explains that more complex swaps that involve features like compounding, LIBOR-in-arrears rates, CMS rates, differentials between currencies, embedded options, or indexed/commodity prices cannot be accurately valued simply by assuming forward rates will be realized and requires additional adjustments. These adjustments include convexity adjustments, timing adjustments, quanto adjustments, and considering the embedded option features.
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Chap 9
1. The document discusses key properties and relationships involving stock options, including how the price of calls and puts are affected by variables like the stock price, strike price, time to expiration, volatility, and interest rates.
2. It explores the difference between American and European options and conditions where an arbitrage opportunity may exist.
3. The document examines the potential to exercise American options early and reasons why calls on non-dividend paying stocks usually are not exercised early.
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Chap 2
- Futures contracts are exchange-traded agreements to buy or sell an asset at a predetermined price on a specified future date. They are standardized and settled daily through margin accounts.
- Margins are deposits that minimize the risk of default by requiring maintenance of a minimum account balance. Daily price fluctuations result in gains or losses being deposited to or withdrawn from the margin account.
- A long position in gold futures is established with an initial margin deposit. The daily settlement process results in funds being added to or withdrawn from the margin account depending on price movements of the gold futures contract.
Chap 4
The document discusses interest rates and bond pricing. It defines different types of rates like Treasury rates and LIBOR. It also covers concepts like continuously compounded rates, zero rates, bond yields, and the bootstrap method for constructing a zero curve from market data. Forward rates represent the future implied rates along the current yield curve. Forward rate agreements allow parties to exchange interest payments at a fixed rate versus the future market rate. Bond duration and convexity measure sensitivity to yield changes.
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1) O documento discute a abertura dos mercados de bens e mercados financeiros em três dimensões: abertura dos mercados de bens, mercados financeiros e mercados de fatores.
2) Apresenta gráficos sobre as exportações e importações dos EUA e do Brasil como proporção do PIB ao longo do tempo.
3) Discutem conceitos como taxas de câmbio nominais e a escolha dos consumidores entre bens nacionais e estrangeiros com a abertura dos mercados.
Chap 3
There are two main types of hedges using futures contracts: long hedges and short hedges. Long hedges lock in future purchase prices while short hedges lock in future sale prices. Companies should focus on hedging to minimize risks from market variables like interest rates and exchange rates. However, hedging also introduces basis risk and may not be optimal if competitors do not hedge. The optimal hedge ratio balances reducing risk from changes in the spot price with basis risk from changes in the futures price. Hedging equity portfolios or individual stocks helps manage systematic risk and allows investors to reduce or increase their market exposure.
Chap 1
1) Derivatives are financial instruments whose value is dependent on an underlying asset such as stocks, bonds, currencies or commodities. Common derivatives include futures, forwards, swaps and options.
2) Derivatives are traded both over-the-counter between institutions and on organized exchanges. The total notional value of the over-the-counter market is many times larger than the exchange market.
3) Derivatives are used for hedging risks, speculation, arbitrage and adjusting portfolio exposures without selling existing positions. Traders include hedgers who offset price risks, speculators who take views on markets, and arbitrageurs who exploit pricing inefficiencies.
Chap 8
A call option gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell. European options can only be exercised at expiration, while American options can be exercised at any time before expiration. The document then discusses long and short positions in call and put options and provides examples of profit diagrams for different option positions. It also reviews the key terms, underlying assets, and specifications of exchange-traded options. The document concludes by discussing dividends and stock splits, market makers, margins, warrants, executive stock options, and convertible bonds.
Derivatives
The document discusses derivative markets, including forwards, futures, and options. Forwards are customized contracts to buy or sell an asset at a future date, while futures are standardized contracts traded on exchanges. Options provide the right but not obligation to buy or sell an asset, with call options giving the right to buy and put options the right to sell.
Chap 7
An interest rate swap is an agreement to exchange interest rate cash flows, typically involving one party paying a fixed rate in exchange for a floating rate from the other party. A currency swap involves exchanging principal amounts in different currencies and paying interest on those principal amounts. Swaps allow parties to transform fixed rate assets and liabilities into floating rate, or vice versa, based on their comparative advantage in borrowing costs in fixed vs floating markets. Swaps can be valued as a portfolio of forward contracts or by comparing the values of fixed and floating rate bonds.
Chap 9
1. The document discusses key properties and relationships involving stock options, including how the price of calls and puts are affected by variables like the stock price, strike price, time to expiration, volatility, and interest rates.
2. It explores the difference between American and European options and conditions where an arbitrage opportunity may exist.
3. The document examines the potential to exercise American options early and reasons why calls on non-dividend paying stocks generally should not be exercised early.
Chap 6
The document discusses various topics related to interest rate futures, including:
1) Day count conventions used in different money market instruments and bonds in the US.
2) How treasury bond prices are quoted and how futures contracts work for treasury bonds.
3) Eurodollar futures contracts which are based on 3-month LIBOR rates and how they are settled.
4) How forward rates can be determined from Eurodollar futures and extending the LIBOR zero curve.
5) Duration matching and calculating hedge ratios to hedge interest rate risk.
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Chapter 13
The document discusses the Black-Scholes-Merton model for valuing stock options. It describes the random walk assumption used in the model and how it implies stock prices will follow a lognormal distribution. The Black-Scholes formula for option prices is presented, which values options based on the stock price, strike price, risk-free rate, time to expiration, and volatility. The concept of implied volatility is introduced, which is the volatility input to the Black-Scholes formula that produces the market price. Adjustments to the model for dividends are also covered.
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An interest rate swap is an agreement to exchange cash flows at specified future times according to certain rules. In a typical "plain vanilla" interest rate swap, one party pays a fixed interest rate on a notional principal while the other party pays a floating rate, usually based on LIBOR. Currency swaps involve exchanging principal amounts in different currencies in addition to periodic interest payments. Swaps allow parties to transform fixed rate obligations/investments into floating rate or to gain exposure to another currency. Swaps can be valued by comparing the cash flows of a fixed rate bond to a floating rate bond or as a portfolio of forward rate agreements.
Call and put Options
This document provides an overview of call and put options, including:
- Call options give the buyer the right to purchase an underlying asset at a specified strike price. Put options give the buyer the right to sell an underlying asset at a specified strike price.
- Options have an expiration date and are used for speculation or hedging. Speculators try to profit from price changes, while hedgers use options to reduce risk.
- The value of an option depends on the value of the underlying asset and volatility. At expiration, call options are worth the maximum of the asset price minus strike price and zero. Put options are worth the maximum of strike price minus asset price and zero.
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Cost accounting solutions chapter 2 (1)
cost accounting by polimeni & fabozzi... solutions of chapter 2
http://www.coursehero.com/tutor-profile/mm226/
Chapter no 2 CGS
The document provides information and examples related to cost accounting, including:
1) Exercises calculating cost of goods manufactured, cost of goods sold, prime cost, conversion cost, and total variable cost.
2) Journal entries for the manufacturing cost accounting cycle.
3) Cost of goods manufactured and cost of goods sold statements for multiple companies.
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7. Derivatives Part1 Pdf
This document provides an overview of key concepts related to derivatives, including forwards, futures, hedging strategies, and swaps. It covers forwards and futures contracts, including the cost-of-carry model, computing forward prices, and differences between forwards and futures. Hedging strategies such as short and long hedges are defined. Margin requirements for futures including initial margin, maintenance margin, marking-to-market, and variation margin are also outlined. The role of the clearinghouse is described.
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This document provides an overview of topics to be covered in a module on financial risk management. The topics include:
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4) Modeling volatility in stock prices and interest rates using parametric and non-parametric models, as well as multivariate models.
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Investment Banking
This document provides an introduction to financial derivatives. It defines derivatives as financial instruments whose price is dependent on an underlying asset. Common underlying assets include stocks, bonds, commodities, currencies, and interest rates. Derivatives allow parties to mitigate risks related to price movements of these assets. The document discusses various types of derivatives including forwards, futures, options, and swaps. It also covers key concepts like hedging strategies, margin requirements, and historic derivative-related failures like Barings Bank and Metallgesellschaft.
No arbitrage and randomization of derivatives pricing
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BB_5_Futures & Options_Hull_Chap_5.pptx
1) The document discusses the valuation and pricing of forwards and futures contracts. It provides background on notation used and compares shorting the spot asset versus shorting futures.
2) Various pricing relationships are derived for forwards on securities that provide no income, known income, and known dividend yields. Arbitrage opportunities that enforce the pricing relationships are also explained.
3) A general pricing formula is presented relating the current futures price to the delivery price based on the spot price, delivery price, and interest rates. Examples are shown applying it to different asset types.
4) Applications to stock index futures are discussed, providing examples of major indexes and contracts traded.
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BB_6_Futures & Options_Hull_Chap_6.pptx
This chapter discusses mechanics, duration, and hedging strategies related to interest rate futures. It covers the mechanics of Treasury bond and note futures contracts, including delivery options that provide value to short positions. Eurodollar and Treasury bill futures are also discussed. Duration is introduced as a measure of how long, on average, a bondholder must wait to receive cash flows from a bond. The chapter derives the duration formula and provides an example calculation. It discusses limitations of duration related to assumptions of parallel yield curve shifts and ignores convexity for large shifts.
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Derivatives are financial contracts whose value is dependent on an underlying asset. There are several types of derivatives including forwards, futures, options, and swaps. Derivatives allow participants to hedge risks, speculate, or engage in arbitrage. Derivatives can be exchange-traded or over-the-counter. Common derivatives include commodity derivatives, financial derivatives, and complex derivatives involving interest rates. Forwards, futures, options, and swaps each have unique features regarding trading, settlement, and valuation. Overall, derivatives help investors and businesses manage risks in global financial markets.
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The document discusses several key concepts in finance including:
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2) Interest rates reflect the exchange between present and future resources, with higher rates translating to a steeper slope and greater future resources needed to exchange for present amounts.
3) Net present value, internal rate of return, and other concepts are used to evaluate investments based on discounted cash flows.
Finance over all ppt @ mba finance
The document discusses several key concepts in finance including:
1) Finance involves allocating resources across time through borrowing, lending, and investing. Markets provide information to compare returns and risks of different investments.
2) Interest rates reflect the exchange between present and future resources, with higher rates translating to a steeper slope and greater future resources needed for a present amount.
3) Net present value, internal rate of return, and other concepts are used to evaluate investments based on discounted cash flows.
Basis risk
Basis risk refers to the mismatch in performance between a position hedged using a futures contract versus the underlying asset. The more dissimilar the hedged position and underlying asset are, the greater the basis risk. Factors like interest rates, yields, and the composition of a portfolio can cause the hedge to be imperfect, resulting in basis risk. Basis is the difference between the futures and spot price, and is impacted by costs like storage and interest rates. Unexpected changes in basis over the hedging period represent basis risk.
Derivatives
Derivatives derive their value from underlying assets. There are various types including forwards, futures, options, and swaps. Forward contracts are bilateral agreements to buy or sell an asset in the future at predetermined terms. Futures are standardized forward contracts that are traded on an exchange. Options provide the right but not obligation to buy or sell an asset by a specified date. Swaps involve exchanging cash flows of underlying assets like interest rates or currencies. Derivatives allow participants to hedge or speculate on price movements of the underlying assets.
Derivatives
The document provides an overview of derivatives, including:
- Derivatives derive their value from an underlying asset such as stocks, bonds, commodities, currencies, or interest rates.
- The main types of derivatives are forwards, futures, options, and swaps. Forwards and futures are traded on exchanges while swaps and most options are over-the-counter.
- Derivatives can be used for hedging risk or speculation. They allow investors to gain exposure to assets with greater leverage compared to investing directly in the underlying assets.
FX Forwards and Futures
A forward contract locks in an exchange rate for a currency transaction that will occur at a future date. Currency futures contracts are similar to forwards but are standardized and traded on an exchange, with the exchange clearinghouse assuming default risk rather than the contract counterparties. Swaps involve an initial spot transaction combined with a forward contract to reverse the spot transaction and lock in an exchange rate to convert the currency back to the original one at the end of the period.
Futures And Forwards
Futures and forwards are contracts that require deferred delivery of an underlying asset or cash settlement at a future date. A future is a standardized contract traded on an exchange, while a forward is a customized over-the-counter contract. Forwards are useful when futures do not exist for certain commodities/financials or when standard futures terms do not match needs. Forwards involve counterparty risk while futures involve clearinghouse guarantees.
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This document discusses discount factors and mark-to-market valuation of cross currency swaps. It begins by explaining how discount factors are derived from risk-free bonds and how rates like Libor and OIS are used as proxies. However, it notes that swap rates cannot be directly used as discount factors since they do not guarantee a fixed payment amount at maturity. The document then discusses how to model the cash flows of interest rate swaps and cross currency swaps, and how to calculate stochastic and implied swap rates to value them using mark-to-market approaches.
[Lehman brothers] interest rate parity, money market basis swaps, and cross c...
This document summarizes research on interest rate parity conditions when using rates derived from swap curves. It derives two interest rate parity relationships:
1) A relationship that depends on swap rates, cross-currency basis swap spreads, and the present value of the basis swap spread. This addresses the shortcoming of using default-free rates in the classic parity condition.
2) A second relationship using overnight default-free rates, overnight-3month basis swap spreads in each currency, rather than a cross-currency swap of 3-month rates. This has less practical use but provides insights into how cross-currency basis spreads are determined.
The document reveals that money market basis swap spreads reflect credit risk differences between indices,
Chap 3
There are two main types of hedges using futures contracts: long hedges and short hedges. Long hedges lock in future purchase prices while short hedges lock in future sale prices. Companies should focus on hedging to minimize risks from market variables like interest rates and exchange rates. However, hedging also introduces basis risk and may not be optimal if competitors do not hedge. The optimal hedge ratio balances reducing risk from changes in the spot price with basis risk from changes in the futures price. Hedging an equity portfolio or individual stock using stock index futures contracts can protect against systematic market risks.
Chap 3
There are two main types of hedges using futures contracts: long hedges and short hedges. Long hedges lock in the future purchase price of an asset while short hedges lock in the future sale price. Companies should focus on hedging to minimize risks from market variables like interest rates and exchange rates. However, hedging also introduces basis risk and may not be optimal if competitors do not hedge. When hedging, choosing a futures contract close to but after the hedge period and on a highly correlated asset reduces basis risk and improves the hedge.
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No arbitrage and randomization of derivatives pricing
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Chap 5
- 1. Determination of Forward and Futures Prices Chapter 5
- 5. Notation for Valuing Futures and Forward Contracts Risk-free interest rate for maturity T r : Time until delivery date T : Futures or forward price today F 0 : Spot price today S 0 :
- 19. Why the Relation Must Be True Figure 5.1, page 113