FINANCIAL STATISTICS 4
Formula Sheet
Repayment on a constant
payment loan
r (1 r n)Tn
A P
n (1 r n)Tn 1
Put-call parity for
European options
c X e rT p S0
Itos Lemma
Suppose that cfw_Xt, t 0 follows the Ito process dX a( X , t ) dt b( X , t ) dZ . Let
G b
CHAPTER 2 BASIC IDEAS ABOUT INVESTMENTS
2.1 Asset classes
An asset is a resource with economic value that an individual, corporation or
country owns or controls with the expectation that it will provide future benefit
(http:/www.investopedia.com/terms/a/a
CHAPTER 3 USING BINOMIAL TREES TO PRICE
OPTIONS
In Chapter 2, we looked at pricing strategies for call and put options without
discussing share-price volatility explicitly, so we obtained deterministic rather
than stochastic solutions. In this chapter, we
School of Mathematics
& Statistics
FINANCIAL STATISTICS
Session 2013-14
Professor John H. McColl
Room 233
John.McColl@glasgow.ac.uk
COURSE SUMMARY
1. Basic Ideas about Interest Rates
Reminder some important formulae
Simple and compound interest
Annuities
CHAPTER 4
USING STOCHASTIC PROCESSES TO PRICE OPTIONS
4.1 Geometric Brownian Motion
The price of an asset, in particular a share, will fluctuate in response to a range
of factors the apparent strength of the company, the perceived health of the
whole eco
CHAPTER 5 PORTFOLIOS FOR MANAGING RISK
5.1 Creating Spreads and Combinations
In Chapters 2 4, we discussed the pricing of financial derivatives without
saying much about how such derivatives are used in practice. When investors
use derivatives to reduce t
FINANCIAL STATISTICS 4
Revision Lecture Additional Examples
A stock price, with current value 23, follows Geometric Brownian Motion
with an expected return of 10% p.a. and a volatility of 30% p.a.
(a) Find the probability that a European call option on th