Microsoft PowerPoint - PoF.ppt

Overviewƒ 121 Definition ƒ Perfectly indexed FRNs Multi-period deterministic cash flows: FRNs ...

Definitionƒ 122 Coupon is not fixed but floating, i.e. coupon is reset periodically ƒ Reference rate : money market rate (LIBOR) ...

Perfectly indexed FRNsƒ 123 Perfectly indexed FRN = a floater indexed to a MMT rate with natural time lag which is reset in adva ...

Examplesƒ 124 Some time ago, a German company issued a EUR 5m FRN (at the p.a. EUR LIBOR). Suppose the current conditions are as ...

Overviewƒ 125 Introduction ƒ Forwards ƒ Futures ƒ Options ƒ Swaps ƒ Additional literature ƒ Sercu, P. and Uppal, R., Internation ...

Definition of derivative securitiesƒ 126 A derivative is a contract to bu y or sell something in the future, namely the underlyi ...

Types of derivativesƒ 127 Forwards ƒ Futures ƒ Options ƒ Swaps ƒ Advanced products ƒ Structured products: combinations of forwar ...

Derivatives marketsƒ 128 Over-the-counter markets ƒ non-standardized products; tailor made contracts ƒ telephone or electronic t ...

Purpose of derivativesƒ 129 Risk management : to hedge risks ƒ Arbitrage : to lock in arbitrage profits ƒ Speculation Derivative ...

Overviewƒ 130 Introduction ƒ Definition ƒ Payoffs ƒ Present values ƒ Pricing ƒ Hedging ƒ Problems Derivative securities: Forward ...

Definitionƒ 131 A forward /outright contract is an agreement for the purchase ( long position, forward purchase, FP ) or sale (s ...

Payoffsƒ 132 FP ... the holder is obligated to buy an asset worth S T for F t0,T : ƒ FS ... the holder is obligated to sell an a ...

Present value for a FPƒ 133 Suppose you want to close out a FP at time t, t0<t<T. ƒ At time t : close out a FP by adding a ...

Present value for a FSƒ 134 Suppose you want to close out a FS at time t, t0<t<T. ƒ At time t : Close out a FS by adding a ...

Arbitrage free forward priceƒ 135 Underlying = non-dividend paying security ƒ ... no arbitrage condition ƒ Suppose Ä arbitrage s ...

Arbitrage free forward priceƒ 136 Suppose Ä arbitrage strategy ƒ t=t0 Short forward: 0 -Buy security: -S t0 -Credit at r : +S ...

Arbitrage free forward priceƒ 137 Underlying = dividend-paying security ƒ ... no arbitrage condition Z ... present value of the ...

Arbitrage free forward priceƒ 138 Suppose Ä arbitrage strategy ƒ t=t0 Short forward: 0 -Buy security: -S t0 -Credit at r: +S t ...

Arbitrage free forward priceƒ 139 Underlying = commodity that is an investment asset, e.g. gold ƒ ... no arbitrage condition L . ...

Arbitrage free forward priceƒ 140 Suppose Ä arbitrage strategy ƒ t=t0 Short forward: 0 -Buy security: -S t0 Pay storage costs ...