. What are Derivative Instruments?

A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. Top 2. What are Forward Contracts? A forward contract is a customized contract between two parties, where settlement takes place on a specific date in future at a price agreed today. The main features of forward contracts are They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. The contract has to be settled by delivery of the asset on expiration date. In case the party wishes to reverse the contract, it has to compulsorily go to the same counter party, which being in a monopoly situation can command the price it wants.

Top 3. What are Futures? Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument commodity in a designated future month at a price agreed upon by the buyer and seller.To make trading possible, BSE specifies certain standardized features of the contract. Top 4. What is the difference between Forward Contracts and Futures Contracts? Sr.No 1 2 3 4 Basis Nature Contract Terms Liquidity Margin Payments Futures Traded on organized exchange Standardized More liquid Forwards Over the Counter Customised Less liquid

Requires margin paymentsNot required

5 6

Settlement

Follows daily settlement At the end of the period. Contract can be reversed only with the Can be reversed with any Squaring off same counter-party with whom it was member of the Exchange. entered into. Top

derivatives are financial instruments (contracts) that have their value determined by another (financial) product. there are many types of derivatives. ill name the major 2, options and futures. Futures - a future is a contact to buy of a set amount of potatoes versus a set price at a set date. there are futures for very many different resources. we'll use potatoes in this example. since the price of potatoes fluctuates throughout the year and the tradedate is in the future. we dont exactly know what the future will be worth in the days to come, we can only speculate. an example. you own a future on potatoes. this means you can buy 100'000 kilos of potatoes in june 2010 at $200 per 100 kilo. should the potato price in june be $168 per 100 kilo youd make a loss as you have to buy for 200 while theyre only worth 168 on the other hand you make a profit if the potato price is 220 per kilo. as you buy vs 200. Options - Another good example are options. theyre also contracts. but they dont obligate you to buy. they give you the right to buy. contrary to futures if you would make a loss buying vs the price in the contract you wouldnt use the right. derivatives have been around for centuries. in ancient greece they already had futures and options on olivepresses. they did not contribute to the economic crisis. The cause of the crisis was bad analyses of credit responsibilities in the housing market. People who were never able to pay their mortges got mortages anyhow. this created debt at banks. Debt they were unable to resolve. derivatives actually provide an economical stabalizing effect as they can be used to lock prices and lock value at a set point. for example, youre a potatofarmer. you have a field of potatoes. but the price of potatoes is subject to change, so as your field grows the value constantly changes giving you a lot of insecurity. so you sell a future. this obligates to sell potatoes for a set price in the future. now whatever happens to the potato price. youll always have to sell vs the price set in the contract ensuring you a set income. 3 years ago Report

The Binomial Distribution

In many cases, it is appropriate to summarize a group of independent observations by the number of observations in the group that represent one of two outcomes. For example, the proportion of individuals in a random sample who support one of two political candidates fits this description. In this case, the statistic is the count X of voters who support the candidate divided by the total number of individuals in the group n. This provides an estimate of the parameter p, the proportion of individuals who support the candidate in the entire population. The binomial distribution describes the behavior of a count variable X if the following conditions apply: 1: The number of observations n is fixed. 2: Each observation is independent. 3: Each observation represents one of two outcomes ("success" or "failure"). 4: The probability of "success" p is the same for each outcome. If these conditions are met, then X has a binomial distribution with parameters n and p, abbreviated B(n,p). Example Suppose individuals with a certain gene have a 0.70 probability of eventually contracting a certain disease. If 100 individuals with the gene participate in a lifetime study, then the distribution of the random variable describing the number of individuals who will contract the disease is distributed B(100,0.7). Note: The sampling distribution of a count variable is only well-described by the binomial distribution is cases where the population size is significantly larger than the sample size. As a general rule, the binomial distribution should not be applied to observations from a simple random sample (SRS) unless the population size is at least 10 times larger than the sample size. To find probabilities from a binomial distribution, one may either calculate them directly, use a binomial table, or use a computer. The number of sixes rolled by a single die in 20 rolls has a B(20,1/6) distribution. The probability of rolling more than 2 sixes in 20 rolls, P(X>2), is equal to 1 - P(X<2) = 1 - (P(X=0) + P(X=1) + P(X=2)). Using the MINITAB command "cdf" with subcommand "binomial n=20 p=0.166667" gives the cumulative distribution function as follows:

Binomial with n = 20 and p = 0.166667 x 0 1 2 3 4 5 6 7 8 9 P( X <= x) 0.0261 0.1304 0.3287 0.5665 0.7687 0.8982 0.9629 0.9887 0.9972 0.9994

The corresponding graphs for the probability density function and cumulative distribution function for the B(20,1/6) distribution are shown below:

Since the probability of 2 or fewer sixes is equal to 0.3287, the probability of rolling more than 2 sixes = 1 - 0.3287 = 0.6713. The probability that a random variable X with binomial distribution B(n,p) is equal to the value k, where k = 0, 1,....,n , is given by

, where

. The latter expression is known as the binomial coefficient, stated as "n choose k," or the number of possible ways to choose k "successes" from n observations. For example, the number of ways to achieve 2 heads in a set of four tosses is "4 choose 2", or 4!/2!2! = (4*3)/(2*1) = 6. The possibilities are {HHTT, HTHT, HTTH, TTHH, THHT, THTH}, where "H" represents a head and "T" represents a tail. The binomial coefficient multiplies the probability of one of these possibilities (which is (1/2)(1/2) = 1/16 for a fair coin) by the number of ways the outcome may be achieved, for a total probability of 6/16.

Mean and Variance of the Binomial Distribution

The binomial distribution for a random variable X with parameters n and p represents the sum of n independent variables Z which may assume the values 0 or 1. If the probability that each Z variable assumes the value 1 is equal to p, then the mean of each variable is equal to 1*p + 0*(1-p) = p, and the variance is equal to p(1-p). By the addition properties for independent random variables, the mean and variance of the binomial distribution are equal to the sum of the means and variances of the n independent Z variables, so

These definitions are intuitively logical. Imagine, for example, 8 flips of a coin. If the coin is fair, then p = 0.5. One would expect the mean number of heads to be half the flips, or np = 8*0.5 = 4. The variance is equal to np(1-p) = 8*0.5*0.5 = 2.

Sample Proportions
If we know that the count X of "successes" in a group of n observations with sucess probability p has a binomial distribution with mean np and variance np(1-p), then we are able to derive information about the distribution of the sample proportion , the count of successes X divided by the number of observations n. By the multiplicative properties of the mean, the mean of the distribution of X/n is equal to the mean of X divided by n, or np/n = p. This proves that the sample proportion is an unbiased estimator of the population proportion p. The variance of X/n is equal to the variance of X divided by n, or (np(1-p))/n = (p(1-p))/n . This formula indicates that as the size of the sample increases, the variance decreases. In the example of rolling a six-sided die 20 times, the probability p of rolling a six on any roll is 1/6, and the count X of sixes has a B(20, 1/6) distribution. The mean of this distribution is 20/6 = 3.33, and the variance is 20*1/6*5/6 = 100/36 = 2.78. The mean of the proportion of sixes in the 20 rolls, X/20, is equal to p = 1/6 = 0.167, and the variance of the proportion is equal to (1/6*5/6)/20 = 0.007.

Normal Approximations for Counts and Proportions

For large values of n, the distributions of the count X and the sample proportion are approximately normal. This result follows from the Central Limit Theorem. The mean and variance for the approximately normal distribution of X are np and np(1p), identical to the mean and variance of the binomial(n,p) distribution. Similarly, the mean and variance for the approximately normal distribution of the sample proportion are p and (p(1-p)/n).

Note: Because the normal approximation is not accurate for small values of n, a good rule of thumb is to use the normal approximation only if np>10 and np(1-p)>10. For example, consider a population of voters in a given state. The true proportion of voters who favor candidate A is equal to 0.40. Given a sample of 200 voters, what is the probability that more than half of the voters support candidate A? The count X of voters in the sample of 200 who support candidate A is distributed B(200,0.4). The mean of the distribution is equal to 200*0.4 = 80, and the variance is equal to 200*0.4*0.6 = 48. The standard deviation is the square root of the variance, 6.93. The probability that more than half of the voters in the sample support candidate A is equal to the probability that X is greater than 100, which is equal to 1- P(X< 100). To use the normal approximation to calculate this probability, we should first acknowledge that the normal distribution is continuous and apply the continuity correction. This means that the probability for a single discrete value, such as 100, is extended to the probability of the interval (99.5,100.5). Because we are interested in the probability that X is less than or equal to 100, the normal approximation applies to the upper limit of the interval, 100.5. If we were interested in the probability that X is strictly less than 100, then we would apply the normal approximation to the lower end of the interval, 99.5. So, applying the continuity correction and standardizing the variable X gives the following: 1 - P(X< 100) = 1 - P(X< 100.5) = 1 - P(Z< (100.5 - 80)/6.93) = 1 - P(Z< 20.5/6.93) = 1 - P(Z< 2.96) = 1 - (0.9985) = 0.0015. Since the value 100 is nearly three standard deviations away from the mean 80, the probability of observing a count this high is extremely small. RETURN TO MAIN PAGE.

The Binomial Distribution

In many cases, it is appropriate to summarize a group of independent observations by the number of observations in the group that represent one of two outcomes. For example, the proportion of individuals in a random sample who support one of two political candidates fits this description. In this case, the statistic is the count X of voters who support the candidate divided by the total number of individuals in the group n. This provides an estimate of the parameter p, the proportion of individuals who support the candidate in the entire population.

The binomial distribution describes the behavior of a count variable X if the following conditions apply: 1: The number of observations n is fixed. 2: Each observation is independent. 3: Each observation represents one of two outcomes ("success" or "failure"). 4: The probability of "success" p is the same for each outcome. If these conditions are met, then X has a binomial distribution with parameters n and p, abbreviated B(n,p). Example Suppose individuals with a certain gene have a 0.70 probability of eventually contracting a certain disease. If 100 individuals with the gene participate in a lifetime study, then the distribution of the random variable describing the number of individuals who will contract the disease is distributed B(100,0.7). Note: The sampling distribution of a count variable is only well-described by the binomial distribution is cases where the population size is significantly larger than the sample size. As a general rule, the binomial distribution should not be applied to observations from a simple random sample (SRS) unless the population size is at least 10 times larger than the sample size. To find probabilities from a binomial distribution, one may either calculate them directly, use a binomial table, or use a computer. The number of sixes rolled by a single die in 20 rolls has a B(20,1/6) distribution. The probability of rolling more than 2 sixes in 20 rolls, P(X>2), is equal to 1 - P(X<2) = 1 - (P(X=0) + P(X=1) + P(X=2)). Using the MINITAB command "cdf" with subcommand "binomial n=20 p=0.166667" gives the cumulative distribution function as follows:
Binomial with n = 20 and p = 0.166667 x 0 1 2 3 4 5 6 7 8 9 P( X <= x) 0.0261 0.1304 0.3287 0.5665 0.7687 0.8982 0.9629 0.9887 0.9972 0.9994

The corresponding graphs for the probability density function and cumulative distribution function for the B(20,1/6) distribution are shown below:

Since the probability of 2 or fewer sixes is equal to 0.3287, the probability of rolling more than 2 sixes = 1 - 0.3287 = 0.6713. The probability that a random variable X with binomial distribution B(n,p) is equal to the value k, where k = 0, 1,....,n , is given by

, where

. The latter expression is known as the binomial coefficient, stated as "n choose k," or the number of possible ways to choose k "successes" from n observations. For example, the number of ways to achieve 2 heads in a set of four tosses is "4 choose 2", or 4!/2!2! = (4*3)/(2*1) = 6. The possibilities are {HHTT, HTHT, HTTH, TTHH, THHT, THTH}, where "H" represents a head and "T" represents a tail. The binomial coefficient multiplies the probability of one of these possibilities (which is (1/2)(1/2) = 1/16 for a fair coin) by the number of ways the outcome may be achieved, for a total probability of 6/16.

Mean and Variance of the Binomial Distribution

The binomial distribution for a random variable X with parameters n and p represents the sum of n independent variables Z which may assume the values 0 or 1. If the probability that each Z variable assumes the value 1 is equal to p, then the mean of each variable is equal to 1*p + 0*(1-p) = p, and the variance is equal to p(1-p). By the addition properties for independent random variables, the mean and variance of the binomial distribution are

equal to the sum of the means and variances of the n independent Z variables, so

These definitions are intuitively logical. Imagine, for example, 8 flips of a coin. If the coin is fair, then p = 0.5. One would expect the mean number of heads to be half the flips, or np = 8*0.5 = 4. The variance is equal to np(1-p) = 8*0.5*0.5 = 2.

Sample Proportions
If we know that the count X of "successes" in a group of n observations with sucess probability p has a binomial distribution with mean np and variance np(1-p), then we are able to derive information about the distribution of the sample proportion , the count of successes X divided by the number of observations n. By the multiplicative properties of the mean, the mean of the distribution of X/n is equal to the mean of X divided by n, or np/n = p. This proves that the sample proportion is an unbiased estimator of the population proportion p. The variance of X/n is equal to the variance of X divided by n, or (np(1-p))/n = (p(1-p))/n . This formula indicates that as the size of the sample increases, the variance decreases. In the example of rolling a six-sided die 20 times, the probability p of rolling a six on any roll is 1/6, and the count X of sixes has a B(20, 1/6) distribution. The mean of this distribution is 20/6 = 3.33, and the variance is 20*1/6*5/6 = 100/36 = 2.78. The mean of the proportion of sixes in the 20 rolls, X/20, is equal to p = 1/6 = 0.167, and the variance of the proportion is equal to (1/6*5/6)/20 = 0.007.

Normal Approximations for Counts and Proportions

For large values of n, the distributions of the count X and the sample proportion are approximately normal. This result follows from the Central Limit Theorem. The mean and variance for the approximately normal distribution of X are np and np(1p), identical to the mean and variance of the binomial(n,p) distribution. Similarly, the mean and variance for the approximately normal distribution of the sample proportion are p and (p(1-p)/n). Note: Because the normal approximation is not accurate for small values of n, a good rule of thumb is to use the normal approximation only if np>10 and np(1-p)>10. For example, consider a population of voters in a given state. The true proportion of voters who favor candidate A is equal to 0.40. Given a sample of 200 voters, what is the probability that more than half of the voters support candidate A?

The count X of voters in the sample of 200 who support candidate A is distributed B(200,0.4). The mean of the distribution is equal to 200*0.4 = 80, and the variance is equal to 200*0.4*0.6 = 48. The standard deviation is the square root of the variance, 6.93. The probability that more than half of the voters in the sample support candidate A is equal to the probability that X is greater than 100, which is equal to 1- P(X< 100). To use the normal approximation to calculate this probability, we should first acknowledge that the normal distribution is continuous and apply the continuity correction. This means that the probability for a single discrete value, such as 100, is extended to the probability of the interval (99.5,100.5). Because we are interested in the probability that X is less than or equal to 100, the normal approximation applies to the upper limit of the interval, 100.5. If we were interested in the probability that X is strictly less than 100, then we would apply the normal approximation to the lower end of the interval, 99.5. So, applying the continuity correction and standardizing the variable X gives the following: 1 - P(X< 100) = 1 - P(X< 100.5) = 1 - P(Z< (100.5 - 80)/6.93) = 1 - P(Z< 20.5/6.93) = 1 - P(Z< 2.96) = 1 - (0.9985) = 0.0015. Since the value 100 is nearly three standard deviations away from the mean 80, the probability of observing a count this high is extremely small. RETURN TO MAIN PAGE. Binomial Distribution She realizes then that she cannot turn her back from her husband and daughter . Thus , she convinces Tom that she will not leave them . The events at the hotel lead to the falling action . After the confrontation , Tom allows Daisy to ride with Gatsby back to the East Egg . This is to show his confidence to Gatsby that Daisy will... words: 346 pages: 2 Distribution Advertising decisions are complex and capable of getting influenced by various forces . The decisions arrived at should , therefore , be evaluated in a regular manner so that remedial measures and corrective actions could be taken before it is too late . The use of professionally managed advertising agency proves by and large advantageous to the company . Organisation of news worthy events and... words: 1891 pages: 7 Binomial Distributions

It is seen in the way how its main female hero is repressed . The author demonstrates how a housewife is removed from the society by her repressed position . This demonstration reveals a shocking essence of humans . Nora is actually a Doll who is supposed to be the mistress of the house however this ``mistress ' does not really have any visible... words: 612 pages: 3 Probability Distributions Compliance to rules and regulations is a must and furthermore , the agency is expected to understand loopholes and take advantage of them in the behalf of the client . Therefore , AB Agency Services needed to have a constant understanding of contemporary employment rules and regulations in client 's industry , including tax issues . The agency must also have an understanding of the... words: 693 pages: 3 Prepare A Table Or Graphic Organizer To Illustrate The Three Most Common Forms Of Business Ownership In The U.sin Term Of Who Owns Them ,advantages And Disadvantages Of Each ,and Costs Associated With Their Respective Start -ups. You Should Also Include T Reputation is a multidimensional concept involving both financial and social aspects . The information that is publicly disclosed through reports would be a sufficient determinant of its reputation 14 . Voluntary Information Disclosure Voluntary disclosure of information is the main focus of a public discussion . The new necessities with regard to mandatory disclosures are needed by public companies . This proposed regulation is... words: 228 pages: 1 Distributive Justice This , naturally , has an effect , and quite a profound one . While all groups of young viewers easily recognize shows aimed at their gender and even choose their viewing program on this basis , they are also becoming more acceptant of alternative gender roles in television shows . Cartoons such as ``Pokemon ' are enjoyed by boys and girls alike , and , as a result... words: 641 pages: 3 Distributed System M t W g s 5 vHA W \ b s Z R h A _A IB 8 AT xU ] U iK C KW R 7 d [ rOh pM L_D 4 1 H F 0 MTG m y 3B bR5x7h a d T A Wl2 e -B X rx K rdsT !n s 4l B Zt UJ ve... words: 559 pages: 3 Advantages And Disadvantages Of Technology Adj265 An organism uses electric current in its nervous system . This electric current , produced by the brain are transported to certain nerve cells found all throughout the body . This

electric current is used as a message from the brain to give instructions from the sensory to the motor neurons , this dictates body movements . The charge from the stun gun combines with... words: 1108 pages: 5 Income Distribution And Poverty Secondly , it involves the strengthening of supra-national institutions , to which they believe large corporations have disproportionate access . The WTO is the most often criticized international institution in this regard , and the Trade Related Intellectual Property Rights (TRIPS ) agreement is the most often criticized outcome of this perceived influence . Thirdly , globalization is believed to exacerbate the problem of excessive corporate political... words: 2834 pages: 11 Advantages & Disadvantages Of Swap United States and was therefore able to borrow Swiss francs in the Swiss market on extremely favorable terms compared with all other foreign borrowers--that is , at about the same rate as the Swiss government . The World Bank , having used the Swiss market several times in recent years and being involved with third-world loans , was not regarded quite so favorably by... words: 2341 pages: 9 Channels Of Distribution Different distribution and marketing plans are needed for each product , and their marketing methods can either enhance or depress the sales of one another . Thus , it is desirable that a retailer sell a large part of the product line of a company . Brand positioning of the company 's products is also affected by distribution methods . It would be strange to... words: 1450 pages: 6 Disadvantages Of Technology In Education Gips , DiMattia Gips . Low budget schools and poor students would not be able to buy a computer , when computer become a basic necessity for students . This would cause unjust conditions on the part of poor schools and students , with regard to education . Even when computers are bought , the need for expensive software or hardware would again be another financial strain... words: 1000 pages: 4 Ilustrate The Advantages And Disadvantages Of Being Female.

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Case Study: the Binomial Distribution

Moving in and out of parentheses: For real x and integer k and positive integer m, prove: kx k! = x x 1 k 1! and km x k ! = xm x m k m! Let Sn be the number of successes in n Bernoulli trials with success probability p. Then Sn _ B(n; p), i.e., Sn has the Binomial distribution with parameters n and p. Calculate E(Sn) in two ways: (1) by calculating E(Sn) =Xk n k!pkqnk and (2) by representing Sn as the sum of Bernoulli r.v.s: Sn = X1 + X2 + _ _ _ + Xn. In case (1) you'll use the _rst binomial-coe_cient identity above and the fact that B(n 1; p) probabilities add up to 1. In case (2) you'll check that E(Xj) = p and use the linearity property of expectation. The variance _2 and its nonnegative square root _, the standard deviation, are measures of the variability or spread or dispersion of the r,v, values. If _ = E(X) is the mean, then

_2 = V ar(X) = E[(X _)2] = : : : = E(X2) _2 = : : :E(X2) + _ _2: Fill in the gaps in the above chain of equalities. Calculate Var(Sn) in two ways: (1) by calculating E(X2) =Xk k2 n k!pkqnk and (2) by representing Sn as the sum of Bernoulli r.v.s: Sn = X1 + X2 + _ _ _ + Xn. In case (1) you'll use formulas from above together with the fact that the B(n 2; p) probabilities sum to 1. In case (2) you'll check that Var(Xj) = pq and use the fact that the variance of a sum of independent r.v.s is the sum of the variances. The probability generating function of a nonnegative integer-valued r.v. X is the function of z (or t or whatever) given by E(zX) =Xk zkP(X = k): Calculate E(zSn) using the binomial theorem.

Case Study: the Binomial Distribution

Moving in and out of parentheses: For real x and integer k and positive integer m, prove: kx k! = x x 1 k 1! and km x k ! = xm x m k m! Let Sn be the number of successes in n Bernoulli trials with success probability p. Then Sn _ B(n; p), i.e., Sn has the Binomial distribution with parameters n and p. Calculate E(Sn) in two ways: (1) by calculating E(Sn) =Xk n k!pkqnk and (2) by representing Sn as the sum of Bernoulli r.v.s: Sn = X1 + X2 + _ _ _ + Xn. In case (1) you'll use the _rst binomial-coe_cient identity above and the fact that B(n 1; p)

probabilities add up to 1. In case (2) you'll check that E(Xj) = p and use the linearity property of expectation. The variance _2 and its nonnegative square root _, the standard deviation, are measures of the variability or spread or dispersion of the r,v, values. If _ = E(X) is the mean, then _2 = V ar(X) = E[(X _)2] = : : : = E(X2) _2 = : : :E(X2) + _ _2: Fill in the gaps in the above chain of equalities. Calculate Var(Sn) in two ways: (1) by calculating E(X2) =Xk k2 n k!pkqnk and (2) by representing Sn as the sum of Bernoulli r.v.s: Sn = X1 + X2 + _ _ _ + Xn. In case (1) you'll use formulas from above together with the fact that the B(n 2; p) probabilities sum to 1. In case (2) you'll check that Var(Xj) = pq and use the fact that the variance of a sum of independent r.v.s is the sum of the variances. The probability generating function of a nonnegative integer-valued r.v. X is the function of z (or t or whatever) given by E(zX) =Xk zkP(X = k): Calculate E(zSn) using the binomial theorem.

Case Study: the Binomial Distribution

Moving in and out of parentheses: For real x and integer k and positive integer m, prove: kx k! = x x 1 k 1! and km x k ! = xm x m k m! Let Sn be the number of successes in n Bernoulli trials with success probability p. Then Sn _ B(n; p), i.e., Sn has the Binomial distribution with parameters n and p. Calculate E(Sn) in two ways: (1) by calculating

E(Sn) =Xk n k!pkqnk and (2) by representing Sn as the sum of Bernoulli r.v.s: Sn = X1 + X2 + _ _ _ + Xn. In case (1) you'll use the _rst binomial-coe_cient identity above and the fact that B(n 1; p) probabilities add up to 1. In case (2) you'll check that E(Xj) = p and use the linearity property of expectation. The variance _2 and its nonnegative square root _, the standard deviation, are measures of the variability or spread or dispersion of the r,v, values. If _ = E(X) is the mean, then _2 = V ar(X) = E[(X _)2] = : : : = E(X2) _2 = : : :E(X2) + _ _2: Fill in the gaps in the above chain of equalities. Calculate Var(Sn) in two ways: (1) by calculating E(X2) =Xk k2 n k!pkqnk and (2) by representing Sn as the sum of Bernoulli r.v.s: Sn = X1 + X2 + _ _ _ + Xn. In case (1) you'll use formulas from above together with the fact that the B(n 2; p) probabilities sum to 1. In case (2) you'll check that Var(Xj) = pq and use the fact that the variance of a sum of independent r.v.s is the sum of the variances. The probability generating function of a nonnegative integer-valued r.v. X is the function of z (or t or whatever) given by E(zX) =Xk zkP(X = k): Calculate E(zSn) using the binomial theorem.