FINA2204 Selected formulae

1. black-Scholes Option pricing model: S  σ2 S  σ2 

ln  +  r + T ln  +  r − T
X  2  X  2 
d1 = d 2 = d1 − σ T =
C = S N (d1 ) − Xe − rT N (d 2 ) σ T σ T

2. The value of a forward contract

At time t: Vt = St – F0(1+r)–(T – t) At time T: VT = ST – F0

3. Forward and futures pricing model

f0 = S0 + θ - χ E(ST) = f0 + E(φ).

With dividend payment: f0 = (S0 – D0)(1+r)T or f 0 (T) = S0e (rc −δ c )T

F0d / f (1 + rd )T
4. Interest rate parity =
S0d / f (1 + rf )T
5. Futures hedge ratio Nf = –∆S/∆f
D S S (1 + y f )
N f =
Price sensitivity hedge ratio: D f f (1 + y S )

Stock index futures hedging: Nf = – (βS / βf) (S / f)

6. T-bond cash delivery cost

= f0(T)(CF) + AIT – [(B + AIt)(1+r)(T-t) – CIc,T]

7. Interest rate swaps

 Days 
Net cash flow: (Notional principal) (LIBOR - Fixed rate)  
 360 
 
  1
Pricing of interest swaps: R =  1   1 − B 0(t n )  B0( ti ) =
 q  n 
t
1 + LIBOR0 ( ti ) i
 
 ∑ 0(t i ) 
B 360
 i =1 

Valuation of interest rate swaps: VSWAP = VFLRB – VFXRB

days n 1 + L 0(t1 ) q
VFXRB = R (∑ B0(ti ) ) + B0(tn ) VFLRB =
360 i =1 1 + L t (t1 ) (t1 − t)/360

Notional Principal( LIBOR T - f)(m/360)

8. Payoff of an FRA:
1 + LIBOR T (m/360)
9. Interest rate options:
payoff of an interest rate call: (Notional Principal) (Max(0, LIBOR − X)(m/360) )

Payoff of an interest rate put: (Notional Prinicpal)(Max(0, X - LIBOR)(m/360) )

10. Portfolio insurance Number of puts/stocks: N = V / (S0+P)

Formula Sheet 2006