Formulaes:

1. Fo(T) = So(1+r)^T; Soe^-rt ( In case of continuous )

2. Vo = 0
3. Vt = St-Fo(T)
4. F0(T) = (S0 – γ + θ)(1 + r)T
E ( ST )
5. S0= −θ+ γ
( 1+r + λ )  T
6. Valuing a European option
a. Call: Max (0, ST-X)
b. Put: Max (0, X-ST)
7. Factors affecting value of options

Call Put
Underlying Direct Indirect
Price
Exercise Indirect Direct
Price
Risk free Direct Indirect
rate
Time Direct Direct
Volatility Direct Direct

T
8. Put- Call Parity: S0 + p0=c 0+ X / ( 1+r )
T T
9. Put – Call Forward Parity: F 0 ( T ) / ( 1+ r ) + p0=c 0+ X / ( 1+ r )
10. Minimum European Values: European: Call= Max(0, St-X/(1+RF)^t), Put= Max (0,
X/(1+Rf)^t-St)
11. Minimum American Values: American: Call=Max (0,St-X/(1+Rf)^t), Put= Max (0, X-St)
12. BSM
 European call: c = SN(d1) – e–rTXN(d2) and
 European put: p = e–rTXN(–d2) – SN(–d1), where
S σ2

d 1=
ln( )(
X
+ r+ )
2
T
and d 2=d 1−σ √ T
σ √T
 N(x) denotes the standard normal cumulative distribution function.
13. Carry Benefits
 European call: c = Se–γTN(d1) – e–rTXN(d2) and
 European put: p = e–rTXN(–d2) – Se–γTN(–d1) where
 S σ2

d 1=
ln
X ( )(
+ r−γ +
2
T )
and d 2=d 1−σ √ T
σ √T
 For an underlying equity paying a dividend, the BSM model adjusts the stock
price by e–γT to reflect the continuous payout.
14. Currencies
f
−r T
 European call: c=S e N ( d 1 ) −e−rT XN ( d 2 ) and
f
−r T

−rT
European put: p=e XN (−d 2 )−S e N (−d 1 ) where

S σ2
d 1=
ln
X ( )(
+ r−r f +
2
T )
and d 2=d 1−σ √ T
σ √T
15. Futures contract
 European call: c = e–rT[F0(T)N(d1) – XN(d2)] and
 European put: p = e–rT[XN(–d2) – F0(T)N(–d1)] where
F (T ) σ2

d 1=
ln 0
X[ ]( )
+
2
T
and d 2=d 1−σ √ T
σ √T
 Note that F0(T) denotes the futures price at time 0 that expires at time T, and σ
denotes the volatility related to the futures price. The other terms are as
previously defined.
16. Interest rate option Valuation
−r (t + t )
 European call: c= ( AP ) e [ FRA ( 0 , t j−1 ,t m ) N ( d 1 )−R X N ( d 2 ) ]
j−1 m

−r (t j−1+ t m )
 European put: p= ( AP ) e [ R X N (−d 2) −FRA ( 0 , t j−1 , t m ) N (−d 1) ]
FRA ( 0 ,t j−1 , t m ) σ2

d 1=
ln
[ RX ]( )
+ t
2 j−1 and d 2=d 1−σ √ t j−1
σ √ t j −1
 FRA(0,tj–1,tm): Fixed rate on a FRA at time 0 that expires at time tj–1, where the
underlying matures at time tj (= tj–1 + tm), with all times expressed on an annual
basis.
 RX: exercise rate expressed on an annual basis
 σ: underlying FRA interest rate volatility
 AP: accrual period in years
17. Swaption Valuation
 Payer swaption: PAYSWN = (AP)PVA[RFIXN(d1) – RXN(d2)]
 Receiver swaption: RECSWN = (AP)PVA[RXN(–d2) – RFIXN(–d1)]
R σ2

d 1=
ln FIX +
RX ( )( )
2
T
and d 2=d 1−σ √ T
σ √T
 The present value of an annuity matching the forward swap payment is:
 n
 PVA=∑ PV 0 ,t ( 1 ) j
j=1
 RFIX: Fixed swap rate starting when the swaption expires
 T: Swaption expiration quoted on an annual basis
 RX: Exercise rate starting at time T (annual basis)
 AP: Accrual period.
 σ: Volatility of the forward swap rate
18. The optimal number of hedging units, NH, is NH = –(Portfolio delta/DeltaH)
19. Stock Delta = +1.0
20. Call Delta: Deltac = N(d1). So, 0 ≤ delta of a call ≤ 1.
21. Put Delta: Deltap = N(d1)-1 So, –1 ≤ delta of a put ≤ 0

22. FRA

FRA (0,270,90)

[1+(x%*90/360)] * [1+(10%*270/360)] = [1+(12%*360/360)]

23. Bond
 QF0(T) = [1/CF(T)] × {FV0,T[B0(T + Y) + AI0] – AIT – FVCI0,T}
 QF0(T) = [1/CF(T)] × {FV0,T[B0(T + Y) + AI0] – AIT – FVCI0,T}
 Vt(T) = Present value of difference in forward prices= PVt,T[Ft(T) – F0(T)]

24. Currency
T
( 1+r DC )
 F 0 ( DC / FC , T ) =S 0 ( DC /FC )

(continuous)
[
( 1+r FC )
T
] ; F 0 ( DC / FC , T ) =S 0 ( DC /FC ) e(
r DC ,c −r FC ,c ) T

 Vt(T) = PV$,t,T[Ft($/€,T) – F0($/€,T)]

25. Swap ( EXAMPLE)

  First finding fixed rate: easy way (discounting both the interest rate and
applying to a simple formulae that is: x = (1-d2)/(d1+d2) here x is the fixed
rate.( Remember if there is written annualized than annualized it )
 D1= 1/(1+(9%*180/360)); D2= 1/(1+(10%*360/360))
 In the same question there will be two different rates, second part talks
about 90 days after like that. After 90 days graph will be

 Now we need to find the present value of x. First find the discounting
factor of both the interest rate in the same manner as before.
 Then, PV of fixed rate will be = (x*newd1)+((1+x)*newd2) [note: don’t
use the annualized x]
 Now for PV of floating rate we need to see the first diagram and take
the 180 days floating rate which is 9% here and dividing it into half and
which will give 4.5%
 Pv of floating will be= (1+4.5%)*newd1.

26. Number of Futures = ((Target Beta- Beta)/Future Beta))*Value/Future Price [Multiply

by yield in case of bond]
27. Number of Futures (equitizing cash) = [v(1+r)^t]/QF [ where v = value; Q= future price;
F = multiplier]
28. MV= Number of futures *Q*F
29. Investment= MV/(1+r) ^t
30. No. of units at maturity = Number of futures* F
31. No. of units todays = No of units at maturity/(1+DY) ^t [DY= Dividend yield]
32. Covered call= long on stock + short on call
33. Protective put = Long on stock + long on put
34. Collar= Long on stock + long on put +short on call
35. Bull Spread = Long call with lower exercise price + Short call with higher exercise price
36. Bear Spread = Short put with lower exercise price + Long put with higher exercise price
37. Long Straddle = Long on call + Long on put
38. Calender Spread= Long on long term call + short on short term call
39. Butterfly Spread
X1 X2 X3
Bull Spread Long on call Short on call
Bear Spread Short on call Long on call

40. Box spread

X1 X2
 Bull Spread Long on call Short on call
Bear Spread Short on put Long on put

41. Option Strategy

42. Interest Payment = Loan *( LIBOR at maturity+ Spread)*(Repayment days/360)

43. Option Payoff= Loan *( Libor at maturity -X) *(Repayment days/360)
44. Option Premium Interest = Option Premium *( current rate + spread)*(option
expiry/360)
45. Option premium = Option Payoff + Option Premium Interest
46. Effective Borrowing= Loan – Option Premium
47. Effective Payout= Loan + Interest Payment – Option Payoff
48. Effective Interest= (Effective payout/Effective Borrowing)-1
49. Annual effective interest rate= (1+ effective interest)^365/repayment days -1

Payoff Diagrams