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Formulae-Sheet

# Formulae-Sheet - is earned(equation 4.9 V FRA = L RF K&...

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FINE 448 - Derivatives and Risk Management Formulae Sheet. Midterm # 1. May 23rd, 2007 The basis Basis = Spot price of asset to be hedged - Futures price of contract used Cross hedging Minimum variance hedge ratio h ° = N ° F N A = ° ± S ± F N ° F is the optimal units of of futures contracts (units), N A is the size of position being hedged (units), ° is the R 2 from the regression of ° S against ° F equals °; or often referred to as the correlation. Optimal number of contracts N ° F = N ° Q F N ° = h ° N A Q F N ° is the optimal number of futures contracts for hedging, Q F is the size of one futures contract (units) Hedging an Equity Portfolio h ° = ² CAPM E [ r p ] ° r f = ² ( E [ r M ] ° r f ) where E [] is the expectation operator. Interest Rates Discrete compounding A ° 1 + R m ± nm Continuous compounding Ae rT Forward rates F ( s; T ° s ) = R T T ° R s s T ° s F ( s; T ° s ) = R T + ( R T ° R s ) s T ° s 1

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Forward rates agreement The present value ( time 0 ) of a forward rate agreement where RF
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Unformatted text preview: is earned (equation 4.9) V FRA = L ( RF K & RF ( s;T & s ) ) ( T & s ) e & rT where RF K and RF ( s;T & s ) are rates measured with a compounding frequency re&ecting their maturity. European Options Lower Bound c ± S & D & Ke & rT p ± Ke & rT + D & S Put-Call Parity c + D + Ke & rT = p + S Forward and Futures Prices Forward and Futures Prices ² Non-dividend paying asset F = S e rT ² Known dividend paying asset F = S e ( r & q ) T F = ( S & I ) e rT ² Foreign currency F = S e ( r & r f ) T ² Covenience yield and storage Cost F = S e ( r + u & y ) T F = ( S + U & Y ) e rT Forward Contract Present value of a long forward contract (equation 5.4 in text) f = ( F & K ) e & rT 2...
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