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Formula Sheet
Equities
Notations :
rf risk-free rate
ri return of asset i
i = E[ri ] expected return of asset i ; = E[P1 + D1 ]/P0 1
2
i = var[ri ] variance of asset i
i volatility/risk/standard deviation of asset i
ij = ij i j covariance between assets i and j
ij 0 1 correlation between assets i and j
1
B C
= @ ... A vector of expected returns of N risky assets, N 1
0N2 1
1 12 ... 1N
B .. C
B . 2 ... ... C
=B
B ..
2
..
C
C variance-covariance matrix, N N
@ . . A
... ... 2
0 1N1 N
w1
B .. C
w=@ . A vector of weights/proportions invested in N risky assets, N 1
wN
The covariance between two portfolios P1 and P2, composed of assets A and B, is :
i = rf + i1 1 + i2 2 + + iK K
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Financial Markets 2015-2016
Derivatives
Options payos at expiration :
(
ST K if ST > K
CallT = max(0, ST K) =
0 if ST < K
(
0 if ST > K
P utT = max(0, K ST ) =
K ST if ST < K
where ST is the underlying stock price at expiration date and K is the strike price.
The risk neutral probability is :
S0 (1 + rf ) Sd
=
Su Sd
Call price (same for put price) :
Cu + (1 )Cd
C=
1 + rf
Put-call parity :
K
Ct Pt = S t
(1 + rf )T t
Ct Pt = S t P V (K) P V (div)
where :
N () is the cumulative distribution function of the standard normal distribution
T is the time to maturity
S0 is the spot price of the underlying asset
K is the strike price
r is the risk free rate (annual rate, expressed in terms of continuous compounding)
is the volatility of returns of the underlying asset
2
Financial Markets 2015-2016
Bonds
Present value of future cash-flows is :
T
X CFt
PV =
(1 + rt )t
t=1
where CFt is the cashflow at date t and rt is the spot rate with a maturity of t periods.
where y is the yield to maturity of the bond, F is the face value, and C is the coupon.
3
Financial Markets 2015-2016
The duration is :
T
P 1+y 1 X t CFt
D= =
P y P (1 + y)t
t=1
The percentage change in the price when the convexity is taken into account is :
P 1
= D y + C( y)2
P 2
Swap pricing at initiation, pay fixed and receive floating :
V S = Vf loating Vf ixed
T
X days
Vf ixed = R B0 (t) + B0 (T )
360
t=1
Vf loating = 1, at t=0 or payment date
!
360 1 B0 (T )
R= PT
days t=1 B0 (t)