Annuity
FV of a Mixed Stream
The future value of any stream of cash flows measured at the end of a specified year is
the sum of the future values of the individual cash flows at that years end.
Sometimes called the terminal value
FV of Annuities: Formul
The Black and Scholes Model
The Black-Scholes model is based on the same intuition as the binomial model, but it
presumes that stock prices can move at every instant.
Black and Scholes pricing formula for a European call option on a non-dividend-paying
Exchange Rate Fundamentals Floating exchange rate system Currencies float freely in this system, and exchange rates (prices) are set by supply and demand. US dollar, Japanese yen, British pound, Swiss franc float freely.
Fixed exchange rate system Currenc
Example: Triangular Arbitrage
Suppose that on February 9, 2009, a trader learns that the exchange rate being
offered by a bank in London is C$1.8400/ rather than C$1.8136/ as calculated
previously. What is the arbitrage opportunity? First, note that the
Covered Interest Arbitrage
Borrow C$1,000,000 at 6% per year, convert to 500,000 pounds.
This will grow to 505,000 in six months, at which time you convert back at the forward
rate to C$1,035,250
Next, repay the Canadian loan which takes C$1,030,000
Arbit
Long-Term Financing
Equity capital represents an ownership interest, in the form of either common or
preferred stock.
Debt capital represents borrowing. It is a legally enforceable claim with cash flows that
either are fixed or vary according to a prede
Debt Instruments
Long-term debt instruments can be classified in various ways:
1) Seniority
2) Security
3) Type of interest rate (fixed or floating)
4) Convertibility/callability
5) Tradability
Seniority
Debt is always a senior claim to equity.
Compani
Choices in Financing
Corporations must close financial deficit by borrowing or by issuing new equity
securities.
How much capital to raise each year?
How much raised externally rather than through retained earnings?
How much external funding through b
The Core Principles of Finance
The time value of money
The opportunity to earn a return on invested funds means that a dollar today is
worth more than a dollar in the future.
Compensation for risk
Investors expect compensation for bearing risk.
Dont
Financial Statements
Company managers, investors, and outside analysts use financial statements to conduct
Cash flow analysis
Performance (ratio) analysis
The SEC requires U.S. companies to produce financial statements conforming to
Generally Accepted
Warrants Warrants are securities issued by firms that grant the right to buy shares of stock at a fixed price for a given period of time. Warrants bear a close resemblance to call options. The same five factors that influence call option values will also