Project comments

calculation

(M.DUR -%)
Price volatility (%)
Hold until maturity
Sell before maturity
Stocks
Expected return
Risk
Dividend yield

(%)
Capital gain (YearToDate%)

Price volatility (%)

Passive investment
Speculation

In order to forecast price direction compare Multiples of a company vs industry

Stock evaluation

Expected return and risk

Portfolio calculation

= Annual coupon(%) + Capital gain(%) =
= Annual coupon(%) + ((Pnew-Pold)/Pold *100)/#of years hold

Expected annual return of a bond (if you sell before maturity)(%)

Expected annual return of a stock(%)

= Dividend yield(%) + Capital gain(%) =
= Dividend yield(%) + ((Pnew-Pold)/Pold *100)/#of years hold

stakeholders: debtors and shareholders (based on enterprise value)
Attributable to shareholders only (based

on equity value)

EV/Sales
EV/EBITDA

P/E=Price to Earnings= (Equity Value aka Market Capitalization / Net Income)

Equity

Financial Instruments

a portfolio
Stock evaluation
Expected return and risk
Portfolio calculation
You can assume

during your calculations that Covariance between any securities is zero . However you need separately to comment whether your securities are correlated or not and whether it is good or bad in terms of your portfolio risk

and Forwards

government to raise capital (stocks and bonds) as well as

stock indexes (S&P, Nikkei), interest rates, exchange rates, credit risk, commodities (gold, coffee, corn)…

Derivatives assets
Options, forward and futures contracts, FRAs, Eurodollars, Swaption, CDS, etc. These financial assets are derived from existing primary assets

Securities

Exchange-traded  

Over-the-counter traded 

Why using derivatives?
– Risk management (e.g., hedging)
– Speculation
– Reduce market frictions, e.g., cost of default, taxes, and transaction costs
– Exploit arbitrage opportunities

Exchange-traded

Over-the-counter traded   

Options

Securities

Futures and Forwards

• Put - option to sell underlying asset
A call/put option

gives the owner the right but not the obligation to buy/sell the underlying asset at a predetermined price during a predetermined time period.

• Strike (or exercise) price: the amount paid by the option buyer for the
asset if he/she decides to exercise
• Exercise: the act of paying the strike price to buy the asset
• Expiration: the date by which the option must be exercised or become
Worthless
Premium: the price of the option paid today
• Exercise style: specifies when the option can be exercised
– European-style: can be exercised only at expiration date
– American-style: can be exercised at any time before expiration
– Bermudan-style: can be exercised during specified periods (e.g., on the first day of each month. Bermuda is located between the US and Europe.)

Options

Securities

Futures and Forwards

spot price at expiration – strike price]
Profit = Payoff –

future value of option premium


Example:
S&P Index 6-month Call Option
Strike price = $1,000, Premium = $93.81, 6-month risk-free rate = 2%

– If index value in six months = $1100




– If index value in six months = $900

• Payoff = max [0, $1,100 – $1,000] = $100
• Profit = $100 – ($93.81 x 1.02) = $4.32

• Payoff = max [0, $900 – $1,000] = $0
• Profit = $0 – ($93.81 x 1.02) = – $95.68

Options

Securities

Futures and Forwards

[0, spot price at expiration – strike price]
Profit = Payoff

+ future value of option premium


Example:
S&P Index 6-month Call Option
Strike price = $1,000, Premium = $93.81, 6-month risk-free rate = 2%

– If index value in six months = $1100




– If index value in six months = $900

• Payoff = – max [0, $1,100 – $1,000] = – $100
• Profit = – $100 + ($93.81 x 1.02) = – $4.32

• Payoff = – max [0, $900 – $1,000] = $0
• Profit = $0 + ($93.81 x 1.02) = $95.68

Options

Securities

Futures and Forwards

strike price – spot price at expiration ]
Profit = Payoff

– future value of option premium


Example:
S&P Index 6-month Call Option
Strike price = $1,000, Premium = $93.81, 6-month risk-free rate = 2%

– If index value in six months = $1100




– If index value in six months = $900

• Payoff = max [0, $1,000 – $1,100] = $0
• Profit = $0 – ($93.81 x 1.02) = – $95.68

• Payoff = max [0, $1000 – $900] = $100
• Profit = $100 – ($93.81 x 1.02) = $4.32

Options

Securities

Futures and Forwards

[0, strike price – spot price at expiration ]
Profit =

Payoff + future value of option premium


Example:
S&P Index 6-month Call Option
Strike price = $1,000, Premium = $93.81, 6-month risk-free rate = 2%

– If index value in six months = $1100




– If index value in six months = $900

• Payoff = – max [0, $1,000 – $1,100] = $0
• Profit = $0 + ($93.81 x 1.02) = $95.68

• Payoff = – max [0, $1000 – $900] = – $100
• Profit = – $100 + ($93.81 x 1.02) = – $4.32

Options

Securities

Futures and Forwards

would be profitable
Call: market price>exercise price (denoted by K

or X)
Put: exercise price>market price

Out of the Money - exercise of the option would not be profitable
Call: market pricePut: exercise price
At the Money - exercise price and market price are equal

Options

Securities

Futures and Forwards

agreement made today between a buyer and a seller who

are obligated to complete a transaction at a pre-specified date in the future.

•The buyer and the seller know each other. The
negotiation process leads to customized agreements:
What to trade; Where to trade; When to trade; How much to trade?

Futures Contract
A Futures contract is an agreement made today between a buyer and a seller who are obligated to complete a
transaction at a pre-specified date in the future.

•The buyer and the seller do not know each other. The "negotiation" occurs in an organized future exchange.
•The terms of a futures contract are standardized. The contract specifies what to trade; where to trade; When to
trade; How much to trade; what quality of good to trade.

Options

Securities

Futures and Forwards

for a contract is its value at expiration

Payoff for
– Long

forward = Spot price at expiration – Forward price
– Short forward = Forward price – Spot price at expiration

Example:
– Today: Spot price = $1,000, 6-month forward price = $1,020
– In six months at contract expiration: Spot price = $1,050

• Long position payoff = $1,050 – $1,020 = $30
• Short position payoff = $1,020 – $1,050 = ($30)

Options

Securities

Futures and Forwards

a risky commodity has an inherent long position in this

commodity

When the price of the commodity increases, the profit typically increases

Common strategies to hedge profit:
– Selling forward
– Buying puts
– Selling Calls

Options

Securities

Futures and Forwards