Formula sheet for midterm examination

Options & Futures, 2011-12, ISB Notation

Variable m T r S0 F0 I q K f c U u y h S F N QA QF P F C c P p D Explanation Number of compounding periods per year Time to expiration (in years) of forward, futures or option Continuously-compounded risk-free rate of return Current spot price of asset underlying a forward, futures or option contract Current T -year forward or futures price Present value of known income over the life of a forward or futures contract Continuously-compounded dividend yield Delivery price of forward contract or strike or exercise price of option Value of a forward contract Cost of carry Present value of storage costs paid over the life of a forward contract Continuously-compounded storage cost Convenience yield Optimal hedge ratio Correlation between change in spot prices and change in futures prices Standard deviation of change in spot prices Standard deviation of change in futures prices Optimal number of contracts for hedging Size of position being hedged (units) Size of one futures contract (units) CAPM beta of portfolio Target (or new) CAPM beta of portfolio Current value of portfolio whose value is being hedged Value underlying one stock index futures contract American call option premium European call option premium American put option premium European put option premium Present value of dividends paid over the life of an option Ram Thirumalai

The formulas
1. r = m ln 1 + 2. F0 = S0 erT 3. F0 = (S0 I) erT 4. F0 = S0 e(rq)T 5. f = (F0 K) erT 6. f = (K F0 ) erT 7. F0 = (S0 + U ) erT 8. F0 = S0 e(r+u)T AP R m

9. c = r q + u 10. F0 S0 e(rq+u)T 11. F0 = S0 ecT 12. F0 = S0 e(cy)T 13. Basis = Spot price of asset to be hedged - Futures price of contract used to hedge 14. h = S F QA QF

15. N = h 16. N =

P F P F

17. N = ( )

18. portf olio = w1 1 + (1 w1 )2 19. If S0 = 0 then C = 0 20. C max (S0 K, 0) 21. S0 C c max S0 KerT D, 0 0 22. (D = 0, r > 0) [C = c] 23. If S0 = 0 then P = K 24. P max (K S0 , 0) 25. K P p max D + KerT S0 , 0 0 26. p + S0 D = c + KerT 27. P + S0 D C + K and C + KerT P + S0