FINS3635 FORMULAS

FUTURES AND FORWARDS

Basis: St Ft.
NF
Optimal Hedge Ratio: h* = = S .
NA F
s Ns
Number of optimal contracts: N * = *
F fcs
Forward Prices: no dividends: F0 = S0erT;
dividends: F0 = (S0 I)erT;
dividend yield: F0 = S0e(r q)T;
( r r f )T
currencies: F0 = S0 e ;
commodities: F0 = (S0 + U)erT; or F0 = (S0 + U)e(r y)T.
A Stocks Expected Return, : E[ST] = S0eT.
Value of a Forward Contract (long position): ft = (Ft F0)er(T t).

OPTIONS
Lower Bounds for European Options: max{[S0 PV(D)] PV(X), 0} < c;
max{PV(X) [S0 PV(D)], 0} < p;
Put-Call Parity: p + [S0 PV(D)] = c + PV(X).
Bounds on American Options: [S0 PV(D)] X < C P < S0 PV(X).

BINOMIAL OPTION PRICING

fu fd
Delta: = .
Su Sd

e rt d
Risk-Neutral Probability: p = .
ud
One-Period European Option Price:
fE = S PV(risk-free payoff) = [pf u + (1 p)f d]ert.

Given , find u and d: u = e t

; d = 1/u.