Finance Bootcamp

and Quant basics

Finance Club
Departmental Society for Financial
Engineering
 Topics for the day

● Economics - Business and FInancial

01 Let’s start with the basics ● Corporate Finance
● Financial markets and products

● Probability and Statistics

It’s all about risk and ● Portfolio Management
02 reward ● Risk Management

The stuff that usually ● Derivatives - An Introduction

03 goes above our heads ● Pricing of Derivatives
Economics
 Important Topics - Business Economics
● Opportunity cost
● Demand and Supply curves and equilibrium price
○ Price controls and elasticity
● Principle of diminishing marginal utility
● Production function, Cost function, Revenue, Profit
● Market Structure - Perfect competition, Monopolistic, Oligopoly and Monopoly
● Macroeconomics
○ Circular flow of income, Business cycle, Unemployment and Inflation
● Demand side and Supply side policies
● Central Bank - Monetary policy and Market intervention measures to balance interest rates and
exchange rates

Additional link - https://www.youtube.com/watch?v=PHe0bXAIuk0&feature=share

 Important Topics - Financial Economics

● Time Value of money

● Nominal and real interest rates
○ Repo rate, reverse repo rate, Cash reserve ratio, Statutory Liquidity ratio, Marginal Standing
Facility
● Loan Amortization
● Project Appraisal
○ Net present value, Internal rate of return and payback period
● Inflation index - Calculation of real cash flows and present values
● Term structure of interest rates
 Questions

● What is the difference between repo, reverse repo and MSF rate?
Why has the RBI been reducing the repo rate recently?

● What is break-even point?

● What is an inverted yield curve?

Corporate Finance
 Important Topics

● Investment Decision
○ Capital Budgeting
○ NPV, IRR
○ Basic concepts of Accounting
○ Financial Statement Analysis
○ Ratio Analysis
○ Working Capital
○ CAPM
 Important Topics

● Financing Decision
○ How to finance? Debt or Equity
○ Definition of Debt and Equity.
○ Understanding trade off between ownership and financial benefit like tax deduction
○ How is Equity raised?
○ Initial Public Offering
○ Secondary issue
○ Book Value and MArket value of Equity
● Dividend Policy
○ Gordon Growth Model
○ Miller Modigliani Theory
 Important Concepts: Quick Review

● Capital Budgeting is the process of identifying and evaluating projects where the cash flows will be
received over a period longer than a year is called Capital Budgeting. The following are steps in
Capital budgeting process
1. Idea Creation.
2. Analyzing project proposals.
3. Create the firm-wide capital budget.
4. Monitoring decisions and conducting a post-audit.
● BASIC PRINCIPLES OF CAPITAL BUDGETING
○ Decisions are based on cash flows, not accounting income, incremental cash flows are to be considered.
○ Cash flows are based on opportunity costs. Opportunity costs should be included in project costs
○ The timing of cash flows is important.
○ Cash flows are analyzed on an after-tax basis.
○ Financing costs are reflected in the projects required rate of return.
● Evaluation of projects involve measuring cash flows for which the above principles have to be
considered.
 Important Concepts: Quick Review
Project Evaluation Methods:
 Important jargons and terms
Some important jargons and terms to know before moving ahead:

● To raise capital, a firm either uses owned sources or borrowed ones. Owned capital can be in the form of
equity, whereas borrowed capital refers to the company’s owed funds or say debt.
● Equity: Equity refers to the stock, indicating the ownership interest in the company.
● Debt: debt is the sum of money borrowed by the company from bank or external parties, that required to
be repaid after certain years, along with interest.
● Trade off between ownership control and tax benefits etc.
● Equity can be raised by Initial Public Offering or secondary issue.
● An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public
in a new stock issuance. Public share issuance allows a company to raise capital from public investors.
● Secondary offering is the sale of new or closely held shares by a company that has already made an
initial public offering (IPO)
● Market value of equity- share price of the firm
● Book Value of equity - Capital raised by IPO + retained earnings
 Important jargons and terms
Some important jargons and terms to know before moving ahead:

● Assets: An asset is a resource with economic value that an individual, corporation or country owns or
controls with the expectation that it will provide a future benefit.
● Liabilities: A liability, in general, is an obligation to, or something that you owe somebody else.
Liabilities are defined as a company's legal financial debts or obligations that arise during the course
of business operations.
● Fundamental Accounting Equation: Assets = Liability + Equity
● Balance Sheet: The balance sheet (also called statement of financial position or statement of financial
condition) is a snapshot of the financial status of an organization at a point in time.
● Income Statement: Also known as the profit and loss statement or the statement of revenue and
expense, the income statement primarily focuses on the company’s revenues and expenses during a
particular period.
● Cash flow statement: The statement of cash flows reports the impact of a firm’s operating, investing,
and financing activities on cash flows during the accounting period.
 Making sense of the numbers!- Ratio Analysis
● Financial statement analysis is a useful tool for both external and internal users as they make
decisions about a company or for a company.
● Management uses financial statements to access the adequacy of cash flow to pay operating
expenses, the efficient use of company resources, and how to improve the overall performance of the
company.
● Important Categories of Ratios:
○ Liquidity Ratios
○ Profitability Ratios
○ Solvency Ratios
○ Conversion Cycle Ratios
● Example: different Users and ratios used by them
○ Bankers and other lenders: Debt-to-equity
○ Owners and managers: Gross margin
○ Credit managers: Quick ratio of customers
○ Shareholders: P/E or P/EBITDA
Making sense of the numbers!- Ratio Analysis
 Quick Review: Du Pont Analysis
The original Du Pont Analysis expression is

ROE = NET PROFIT MARGIN x TOTAL ASSET TURNOVER x FINANCIAL LEVERAGE

The extended DuPont expression is:

ROE = OPERATING PROFIT MARGIN * EFFECT OF NON-OPERATING ITEMS * TAX EFFECT * TOTAL ASSET
TURNOVER * FINANCIAL LEVERAGE

The reason for breaking ROE into its components using the DuPont expression (either one) is to gain insight into
firm characteristics that have led to the pattern of ROE observed over time
 Standalone Balance Sheet ------------------- in Rs. Cr. -------------------

Mar 19 Mar 18 Mar 17

EQUITIES AND LIABILITIES

SHAREHOLDER'S FUNDS
Equity Share Capital 679.22 679.22 679.22
Total Share Capital 679.22 679.22 679.22
Revaluation Reserves 0 0 0
Reserves and Surplus 21,483.30 19,491.76 20,483.39
Balance Sheets

Total Reserves and Surplus 21,483.30 19,491.76 20,483.39

Total Shareholders Funds 22,162.52 20,170.98 21,162.61

NON-CURRENT LIABILITIES
Long Term Borrowings 13,919.81 13,155.91 13,686.09
Deferred Tax Liabilities [Net] 205.86 154.61 147.58
Other Long Term Liabilities 399.04 502.37 1,451.47
Long Term Provisions 1,281.59 1,009.48 892.18
Total Non-Current Liabilities 15,806.30 14,822.37 16,177.32

CURRENT LIABILITIES
Short Term Borrowings 3,617.72 3,099.87 5,158.52
Trade Payables 10,408.83 9,411.05 7,082.95
Other Current Liabilities 7,765.57 10,845.11 8,819.71
Short Term Provisions 1,148.69 862.92 477.17
Total Current Liabilities 22,940.81 24,218.95 21,538.35
Total Capital And Liabilities 60,909.63 59,212.30 58,878.28
 12 mths 12 mths 12 mths 12 mths 12 mths

Profit/Loss Before Exceptional, ExtraOrdinary Items And Tax 2,602.00 19.74 -2,014.56 427.65 -3,570.97
Profit and Loss Sheets
Exceptional Items -203.07 -966.66 -338.71 -271.84 -403.75
Profit/Loss Before Tax 2,398.93 -946.92 -2,353.27 155.81 -3,974.72

Tax Expenses-Continued Operations

Current Tax 294.66 92.63 57.06 -7.34 37.34
Less: MAT Credit Entitlement 0 0 0 0 -777.18
Deferred Tax 83.67 -4.7 19.27 2.54 -50.29
Total Tax Expenses 378.33 87.93 76.33 -4.8 764.23
Profit/Loss After Tax And Before ExtraOrdinary Items 2,020.60 -1,034.85 -2,429.60 160.61 -4,738.95
Extraordinary Items 0 0 0 -222.91 0
Profit/Loss From Continuing Operations 2,020.60 -1,034.85 -2,429.60 -62.3 -4,738.95
Profit/Loss For The Period 2,020.60 -1,034.85 -2,429.60 -62.3 -4,738.95

OTHER ADDITIONAL INFORMATION

EARNINGS PER SHARE

Basic EPS (Rs.) 5.94 -3.05 -7.15 -0.18 -15
Diluted EPS (Rs.) 5.94 -3.05 -7.15 -0.18 -15

VALUE OF IMPORTED AND INDIGENIOUS RAW MATERIALS

Imported Raw Materials 0 0 0 0 1,073.39
Indigenous Raw Materials 0 0 0 0 21,081.84

STORES, SPARES AND LOOSE TOOLS

DIVIDEND AND DIVIDEND PERCENTAGE

Equity Share Dividend 0 0 73 0 0
 Cash Flow ------------------- in Rs. Cr. -------------------

Mar 19 Mar 19 Mar 18 Mar 18 Mar 17

Cash Flow Sheets

12 mths 12 mths 12 mths 12 mths 12 mths

Net Profit/Loss Before Extraordinary Items And Tax 2,602.00 0 -1,034.85 -1,034.85 -2,429.60
Net CashFlow From Operating Activities 6,292.63 0 4,133.94 4,133.94 1,453.45
Net Cash Used In Investing Activities -3,820.55 0 -710.27 -710.27 -2,859.00
Net Cash Used From Financing Activities -2,529.70 0 -3,105.63 -3,105.63 1,208.80
Foreign Exchange Gains / Losses -1.8 0 -0.16 -0.16 -1.38
Net Inc/Dec In Cash And Cash Equivalents -59.42 0 317.88 317.88 -198.13
Cash And Cash Equivalents Begin of Year 546.82 0 228.94 228.94 427.07
Cash And Cash Equivalents End Of Year 487.4 0 546.82 546.82 228.94
 Important Concepts: CAPM

Capital Asset Pricing Model

● The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected
return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and
generating expected returns for assets given the risk of those assets and cost of capital.

● The CAPM is used to determine expected return given the asset’s beta.
● The required return is determined by plugging values for Risk-free rate, Market required return, Asset's beta
(measure of systematic risk)
● The goal of the CAPM formula is to evaluate whether a stock is fairly valued when its risk and the time value of
money are compared to its expected return.
 Important Concepts: CAPM
● Assumptions of CAPM
○ Investors are expected to make decisions based solely on risk-return assessments
○ The purchase and sale transactions can be undertaken in infinitely divisible units.
○ Investors can sell short any number of shares without limit.
○ There is perfect competition and no single investor can influence prices, with no transactions costs,
involved.
○ Personal income taxation is assumed to be zero.
○ Investors can borrow/lend, the desired amount at riskless rates.
● Major Utility of CAPM is to determine how a security is priced.
 Important Concepts: Dividend Policy
Gordon Growth Model:
● The Gordon Growth Model is used to determine the intrinsic value of a stock based on a future series of dividends
that grow at a constant rate. It is a popular and straightforward variant of a dividend discount model (DDM).
● Given a dividend per share that is payable in one year and the assumption the dividend grows at a constant rate
in perpetuity, the model solves for the present value of the infinite series of future dividends.

Miller Modigliani Theory:

● According to this concept, investors do not pay any importance to the dividend history of a company and thus,
dividends are irrelevant in calculating the valuation of a company.
● It suggests that dividends and capital gains are equivalent when an investor considers returns on investment. The
only thing that impacts the valuation of a company is its earnings, which is a direct result of the company’s
investment policy and the future prospects. So, according to this theory, once the investment policy is known to
the investor, he will not need any additional input on the dividend history of the company. The investment
decision is, thus, dependent on the investment policy of the company and not on the dividend policy.
 What can you expect in the interview?
(some questions from past interviews)
● Any relevant question based on a topic that is related to Corporate Finance and mentioned in your
CV. Expect thorough grilling on this!
● Is giving dividends good or bad?
● What is CAPM? State its assumptions.
● What are different components of a Balance sheets ?
● What is Working Capital?
● What is WACC?
● Pros and cons of raising fund using Equity/Debt.
● How is ROE calculated? State the DU Pont Analysis.
● What are intangible assets?
● Which method is better to use NPV/IRR? Pros and cons of each.
● What is P/E ratio?
● Explain TVM, DCF.
 Tips and Resources!

● Investopedia for concepts.

● Khan Academy videos for better understanding.
● Smart Summary from CFA level 1 curriculum for relevant topics can serve good foor last
minute revision.
Financial Products
 Money Market Instruments
● Facilitate borrowing and lending in the short term ( Maturity is < 1 Year)
● Examples : Bank Accounts, T-Bills (Govt.), Commercial Papers(Private), Overnight Repos
● Repos : A party sells an asset that they own with a contract to buy it back a higher price
● Repo Rate : Interest rate at which RBI lends money to commercial banks
● Important to maintain liquidity in the market, useful for firms to match short term liabilities
● Characterized by lower returns and lower risks
 Fixed Income Instruments
● Bond is a promise to pay a Principal at maturity and Interest payments(Coupons)spread over time
● Payments are discounted at a certain rate to achieve at the present value of the Bond
● Discount rate that equates the trading price of a bond to its value is known as yield to maturity
● Bond Prices are inversely related to Interest Rates ; so buy bonds cheaper when rates are high!
● Currently bond yields are very low around the world with negative yields in Germany.
● Read up on Duration and Convexity of Bonds
● Remember the T-bill Rate ( risk-free rate) and 10Y Government Bond yield before interviews.
● Corporate Bonds are issued by companies and usually trade at premium to government ones on
account of credit risk (Risk of not fulfilling the payment promise)
Probability
 Type of Questions
● Broadly only two type of questions are asked : Conditional Probability and Expectation Theory
● Conditional Probability Brush Up : Do Stat 110 Harvard Upto Assignment 3 (V.V Important)
● For Interviews : Heard on the Street, 50 Challenging Problems, 40 Challenging Problems, FAQ in
Quantitative Finance by Mark Joshi, CseBlog,BrainStellar should be enough
● Expectation Theory : Many problems form recursive formulations, try questions like “Expected
number of tosses get 3 consecutive heads” from above resources and math stackexchange
● Very Generic Questions : Monty Hall Problem, Roulette Problem, Gambler’s Ruin, Chuck a Luck,
Son or Daughter, Color Switches, Drunk Man, Birthday Problem
Statistics
 Important Topics

● Frequency distributions
● Measures of Central Tendency
○ Mean, median, mode, A.M, G.M.
● Measure of Deviation
○ Range, Mean Absolute Deviation, Standard Deviation
● Central Moments
● Discrete Distributions - PDF, CDF, Expectation, Variance, MGF
○ Bernoulli, Binomial, Poisson
● Continuous Distributions
○ Uniform, Normal, Gamma, Chi-square, T-distribution and F-distribution
● Bivariate Distributions - Joint Prob, Conditional Prob, Marginal Prob, Independence,
Correlation and Covariance
 Important Topics

● Classic Linear Regression Model

○ Assumptions, Estimation of parameters
○ Maximum Likelihood estimation
○ Residual analysis
● Hypothesis testing - Concept of hypothesis, Critical values, p-value, Power of the test
○ T-test
○ F-test
○ Normality test - Jarque-bera

Where to study from -

1) https://newonlinecourses.science.psu.edu/stat414/
2) https://www.youtube.com/watch?v=KbB0FjPg0mw&list=PL2SOU6wwxB0uwwH80
KTQ6ht66KWxbzTI (Do assignments as well)
 Questions

● Does Cov(X,Y) = 0 imply that X and Y are independent?

● When does a T-distribution converge to normal distribution?

● Why is normal distribution not used to model returns in financial modelling?

What are the other distributions that can be considered?
Portfolio Management
 Important Topics

● Objective, assumptions and steps of portfolio management

● Minimum Variance Model
● No arbitrage Law of Price
● Systematic and Unsystematic Risk
● Risk Measures
 Important Concepts: Quick Review
● Portfolio management consists of three main elements: investing time horizon, diversification of investments,
and risk tolerance.
● What Is Diversification? Diversification is a risk management strategy that mixes a wide variety of investments within a
portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting
exposure to any single asset or risk. The rationale behind this technique is that a portfolio constructed of different kinds of
assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security.

MARKOWITZ ASSUMPTIONS
● Returns distribution: Each investment opportunity is looked at by investors as a probability distribution of expected
returns over a given horizon.
● Utility maximization: Investors maximize their expected utility over a given investment horizon, and their indifference
curves exhibit diminishing marginal utility of wealth
● Risk is variability: The variance of expected returns is the risk measure for investors.
● Risk/return: Investors make all investment decisions by considering only the risk and return of an investment
opportunity.
● Risk aversion: Given two investments with equal expected returns, investors prefer the one with the lowest risk.
Likewise, given two investments with equal risk, investors prefer the one with the greatest expected return.
 Important Concepts: Quick Review
● EFFICIENT FRONTIER AND THE OPTIMAL PORTFOLIO: Portfolio is efficient if-
○ Maximizes return for a given risk level
○ Minimizes risk for a given return target.

What is Efficient Frontier?

● The efficient frontier is the set of optimal portfolios that offer the highest expected return for a
defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the
efficient frontier are sub-optimal because they do not provide enough return for the level of risk. The
efficient frontier represents the set of portfolios that will give you the highest return at each level of
risk (or, alternatively, the lowest risk for each level of return).
● The optimal portfolio for each investor is the highest indifference curve that is tangent to the efficient
frontier. The optimal portfolio is the portfolio that gives the investor the greatest possible utility.
 Important Concepts: Quick Review
● CAPITAL MARKET LINE: The introduction of a risk-free asset changes the Markowitz efficient frontier from a
curve into a straight line called the capital market line (CML).

● MARKET PORTFOLIO: The market portfolio is the portfolio consisting of every risky asset; the weights on
each asset are equal to the percentage of the market value of the asset to the market value of the entire
market portfolio.
● UNSYSTEMATIC V/S SYSTEMATIC RISK
Unsystematic risk or diversifiable risk or unique risk is the risk that can be diversified away by adding more
securities to a portfolio.
Systematic risk or non-diversifiable risk or market risk is the risk that cannot be diversified away.Since the
market portfolio contains all risky assets, it must represent the ultimate diversification. All the risk that can
be diversified away must be gone.
 Important Concepts: Quick Review
● BETA
Beta is a standardized measure of systematic risk. Beta measures the sensitivity of a security's returns to
changes in the market return.

● Law of One Price: The law of one price is the economic theory that states the price of an identical security,
commodity or asset traded anywhere should have the same price regardless of location when currency
exchange rates are taken into consideration, if it is traded in a free market with no trade restrictions. The
law of one price exists because differences between asset prices in different locations should eventually be
eliminated due to the arbitrage opportunity.
 Important Concepts: Quick Review
● PORTFOLIO STANDARD DEVIATION
Portfolio standard deviation is not only a function of the variance of the returns of the individual assets in
the portfolio; it is also a function of the correlation (covariance) among the returns of the assets in the
portfolio.

For a portfolio of two risky assets we have:

 What can you expect in the interview?
(some questions from past interviews)
● Any relevant question based on a topic that is related to Portfolio
Management and mentioned in your CV
● What is an efficient frontier?
● What is systematic risk?
● What is beta?
● Can there be any drawback of diversification?
● Formulae for CML, portfolio standard deviation
● Explain process of portfolio management/ what steps are involved?
 Tips and Resources!

● Investopedia for concepts.

● Khan Academy videos for better understanding.
● Smart Summary from CFA level 1 curriculum for relevant topics can serve good foor last
minute revision.
Risk Management
 Brief Introduction

● Risk management for Projects, Portfolios, M&A’s, Investments etc.

● Potential risks - Political, Business, Economic, Natural, Financial
● Steps involved in risk management are :
1. Identify the risks
○ Risk Matrix - Stage of the project v/s Causes of risk
2. Analyse and evaluate the risks
○ Probability of occurrence and degree of dependence on other risks
○ Financial consequences - Risk modelling by scenario analysis/stochastic modelling
3. Possibility and cost of risk mitigation process
○ Avoiding risk, Reducing risk, Reducing uncertainty, Transferring risk, Insuring risk
4. Residual risks that can be accepted
 Some important risks explained

● Credit risk - Risk of a loss resulting from a borrower's failure to repay a loan or meet contractual
obligations
○ Loss given default, Probability of default
○ Merton’s structural model
○ Credit exposure
● Liquidity risk - Risk that a company or bank may be unable to meet short term financial demands.
○ Asset side LR - Inability to successfully liquidate an asset
○ Liability side LR - Inability to fund short-term liabilities
● Operational Risk - Risk of loss resulting from inadequate or failed procedures, systems or policies
○ Formal quantification by actuarial approach - freq of loss and loss severity
○ Basel norms - Basic indicator, Standardised and Advanced measurement approach
 Important Concepts: Risk Measures
● Variance of returns - Variance measures variability from the average or mean. To investors,
variability is volatility, and volatility is a measure of risk
○ But remember, VOLATILITY = sqrt(Variance)
● Semi-variance of returns - Because we are more concerned about downside (return<average)
● Shortfall probabilities - Probability of return falling below a certain level
● Value at risk (VaR) - Assess potential losses over future time period with a given degree of
confidence.
○ If the 95% one-month VAR is $1 million, there is 95% confidence that over the next month
the portfolio will not lose more than $1 million.
● Conditional Value at risk(CVaR) or Expected Shortfall(ES)
○ Expected Shortfall at q% level is the expected return on the portfolio in the worst q% of
cases
○ More sensitive to shape of the tail in the distribution
Derivatives
 Options

● Derive their value from an underlying with a functional form of payoff structure
● Underlying : Stocks, Index, Currency, Commodity Futures
● Call vs Put Option (Payoff Diagrams) ; Call = max(Underlying - Strike,0) ;Put = max(Strik - Und.,0)
● American vs European Options
● Exotics : Barrier and Asian Options
● Option Positions : Long (Pay Premium), Short(Get Premium)
● In the money (Underlying > Strike for Call) sell at a higher price(premium) than Out the money
● Margins : In derivative trading, up-front payments are very small but the Potential for loss is very
high, so brokers keep a margin account so you cannot default
● Volatility of underlying : Biggest factor that drives options prices
● Self Reading : Upper and Lower Bounds for Call & Put European & American Options (Hull Ch10)
 Options

● Put Call Parity (V.V Imp) : Consider two portfolios, A: Call + Zero-Coupon Bond, B :Put +
Underlying Asset. c + K*exp(-rT) = p + S for no arbitrage (Verify using Payoff Diagrams)
● Basic Trading Strategies :
○ Covered Call : Long Stock + Short Call (Protects downside of Short Call)
○ Protective Put : Long Stock + Long Put (Protects downside of Short Put)
○ Bull Spread : Buy Call (K1) Sell Call (K2) where K2 > K1. Hoping price will increase
○ Bear Spread : Buy Put (K1) Sell Put(K2) where K1 > K2. Hoping price will fall
○ Butterfly Spread : Buy Call (K1 & K2), Sell 2 Call(K2). Hoping price will remain restricted
○ Straddle : Buy Call and Put of same strike price. Hoping a big movement in underlying
○ Strangle : Buy Put(K1) Call (K2) where K2 > K1; Big Movement;Downside less than straddle
 Options Pricing

● Derivation of Black-Scholes Equation (PDE):

○ Weiner’s Process : w(t) ~ N(0,sigma*(dt))
○ Geometric Brownian Motion : dS/S = mu*dt + sigma*dw
○ Ito’s Lemma
○ Assumptions : No arbitrage, price follows GBM,no dividends,sigma constant across K,T
● Implied Volatility : Vol which equates BS price to the market trading price ( VIX Index)
● Risk Neutrality : Simply, in market everything is discounted at the risk free rate
● Monte Carlo Simulations : Sampling random outcomes, in risk neutral scenario the expected value
of all those outcomes will be value of option
● Binomial Trees : Basic Formulas, Algorithm to backtrack in risk neutral fashion
 The Greek Letters

● Delta : dC/dS : Long position in call must be hedged with delta units of stock (Covered Call)
● Delta : Always between 0 and 1; Maximum for ITM options
● Theta : dC/dt : Theta is negative, as time passes options become less valuable
● Gamma : d^2C/dS^2 : Gamma is always +ve ; read up how to make delta & gamma neutral
● Vega : dc/dsigma : Vega always +ve; underlying has zero vega
● Portfolio Hedging : How to make a portfolio Delta,Gamma,Vega Neutral
● Relationship : Theta + r*S*Delta + sigma^2*S^2*T = r*Portfolio (V Imp, Hull Ch Greeks)
● Interviews : How do the greeks change with time and stock price
 Futures

● An obligation to buy/sell (Long/Short) the underlying at a later date (Maturity)

● Forwards : OTC, no daily settlement (no mark to market)
● Short Hedge : A farmer who wants to sell crop in December (Long in crop) will enter into short
futures contract. That will fix his selling price and protect him from price dropping
● Long Hedge : Refining company that needs to buy Oil will long oil futures and fix it’s buying price
to protect against price rising.
● Basis : Spot Price - Futures Price
● Minimum Variance Hedge Ratio
● F = S*exp((r-q)T) ; Hull Chapter 5 read how this formula is derived using no arbitrage.
● Forwards vs Futures : S and int rate positive correlated, daily settlement futures can investment
into higher rates, so Futures price > Forward Price
“ALL THE BEST!”

Thank You