Formulae-Sheet-Midterm-2

Formulae-Sheet-Midterm-2 - FINE 448 Derivatives and Risk...

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Unformatted text preview: FINE 448 - Derivatives and Risk Management Formulae Sheet. Midterm #2. June 13th, 2007 You may detach this sheet from the exam for convenience Interest Rates Discrete compounding A & 1 + R m ¡ nm Continuous compounding Ae rT European Options Lower Bound c & S ¡ D ¡ Ke & rT or c & S e & qT ¡ Ke & rT p & Ke & rT + D ¡ S or p & Ke & rT ¡ S e qT Put-Call Parity c + D + Ke & rT = p + S c + Ke & rT = p + S e & qT Binomial Model Volatility matching u = e & p & t ; d = e & & p & t Risk-Neutral probability of an up move p ¡ = a ¡ d u ¡ d where a = e r & t For non dividend paying stock a = e ( r & q )& t For dividend paying stock a = e ( r & r f ) & t For a currency where r f is the foreign risk free rate a = 1 For a futures contract For a two-steps Binomial tree, Risk-Neutral Valuation f = e & r 2& t ¢ p ¡ 2 f u u + 2(1 ¡ p ¡ ) p ¡ f ud + (1 ¡ p ¡ ) 2 f dd £ 1 Log normal distribution for stock price If the percentage change of a stock price follows S T & S S ¡ Normal & &T;¡ p...
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This note was uploaded on 04/14/2010 for the course FINANCE fnce 305 taught by Professor Proftujun during the Spring '10 term at Singapore Management.

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Formulae-Sheet-Midterm-2 - FINE 448 Derivatives and Risk...

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