This preview shows pages 1–9. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Options, Futures, and Other Derivatives 6 th Edition, Copyright John C. Hull 2005 4.1 Interest Rates Chapter 4 Options, Futures, and Other Derivatives 6th Edition, 4.2 Types of Rates Treasury rates LIBOR rates Repo rates Options, Futures, and Other Derivatives 6th Edition, 4.3 Measuring Interest Rates The compounding frequency used for an interest rate is the unit of measurement The difference between quarterly and annual compounding is analogous to the difference between miles and kilometers Options, Futures, and Other Derivatives 6th Edition, 4.4 Continuous Compounding (Page 79) In the limit as we compound more and more frequently we obtain continuously compounded interest rates $100 grows to $ 100e RT when invested at a continuously compounded rate R for time T $100 received at time T discounts to $ 100e RT at time zero when the continuously compounded discount rate is R Options, Futures, and Other Derivatives 6th Edition, 4.5 Conversion Formulas (Page 79) Define R c : continuously compounded rate R m : same rate with compounding m times per year ( 29 R m R m R m e c m m R m c = + =  ln / 1 1 Options, Futures, and Other Derivatives 6th Edition, 4.6 Zero Rates A zero rate (or spot rate), for maturity T is the rate of interest earned on an investment that provides a payoff only at time T Options, Futures, and Other Derivatives 6th Edition, 4.7 Example (Table 4.2, page 81) M aturity (years) Zero Rate (% cont com p) 0.5 5.0 1.0 5.8 1.5 6.4 2.0 6.8 Options, Futures, and Other Derivatives 6th Edition, 4.8 Bond Pricing To calculate the cash price of a bond we discount each cash flow at the appropriate zero rate In our example, the theoretical price of a two year bond providing a 6% coupon semiannually is 3 3 3 103 98 39 0 05 0 5 0 058 1 0 0 064 1 5 0 068 2 0 e e e e    + + + = . . . . . ....
View
Full
Document
This note was uploaded on 02/06/2012 for the course FINANCE 30090 taught by Professor O'neill during the Spring '11 term at University College Dublin.
 Spring '11
 O'neill
 Derivatives, Interest, Interest Rate, Options

Click to edit the document details