Years

Month 2009

observation
January 858.69
Feburary 943.16
March 924.27
April 890.2
May 928.64
June 945.67
July 934.23
August 949.38
September 996.59
October 1043.16
November 1127.04
December 1134.72
Sum 11675.75

standard Variance 7574.91

Standard deviation 87.03
mean 972.98
beta 0.03
volatility
risk free (rf) 2%
marketing return (rm) 8%
cost asset pricing model ke=rf + beta(rm-rf)
Beta A measure of the volatility, or systematic risk, of a security or a portfolio in

The Market Portfolio

expected return 8%
volatility 40%
excess return 6%
tracking error std(rp-rb) 0.05
Portfolio
Expected return (assume) 10%
volatility 0.65
Beta 0.03

Performance Measure
Portfolio excess Return(port rtn) 8%
treynor 2.70
sharpe 0.12
jenson alpha 0.078
information ratio 1.71
assets return--> random variable--->
Distribution
moments
1st moment
2nd moment
3rd moment 0.152110310392099
4th moment -0.692414154108536

Years
Month 2009
observation
January 858.69
Feburary 943.16
March 924.27
April 890.2
May 928.64
June 945.67
July 934.23
August 949.38
September 996.59
October 1043.16
November 1127.04
December 1134.72
Sum 11675.75

mean 956.90
variance 848630.65
std deviation(sigma) 921.211513851433
skew 1.06147721965625
kurtosis 0.103243236038397

Discounted dividend valuation (gordon growth)

Dividend is the amount which corporate give to its share holder

formula s=d/r-g

required rate of return 2.24%

current Divedend 1
Expedted DIV growth 6%
Next dividend in £ 1.06
Price £ 47.32
 Lognormal Distribution
Lognormal Distribution s1=s0exp(r)

future gold price 930.21

required rate of return 2.24%

current Divedend 1
Expedted DIV growth 6%
Next dividend in £ 1.06
stock price(s0)current 47.26
time period(years) 3
future stock price mean 50.55
median 39.76
confidence 95%
two tail 1.96
one tail 1.64
95 %confidence level
Lower 10.23
Upper 154.59
95 % Value at Risk(VaR)
Lower 12.72
absolute var 34.54

Trial random standard normal variable

1 0.263394072579159
2 0.067837733218164
3 0.126419225450159
4 -0.044541076810498
5 0.981800442900865

Student Distribution / T Distribution

Student distribution

Months observation
January 858.69
Feburary 943.16
March 924.27
April 890.2
May 928.64
June 945.67
July 934.23
August 949.38
September 996.59
October 1043.16
November 1127.04
December 1134.72
Sum 11675.75

Mean 0.03
std deviation 0.04
no.of periodic return 11
confidence 95%
significance (1-) 5%

critical Tail 2.23

Lower limit -0.002

Upper limit 0.053

Covariance & Correlation between Assets

covariance is basically the merger of asset A variance and asset B variance and can be find out easily with the help of exce
correaltion is basically see the relationship between two assets and the formula is covariance(A,B)/std deviation of A * std

i am taking the data from the gold observation from chapter 1 find the covariance and then correlation

A observation
January 858.69
Feburary 943.16
March 924.27
April 890.2
May 928.64
June 945.67
July 934.23
August 949.38
September 996.59
October 1043.16
November 1127.04
December 1134.72
Sum 11675.75

Variance of A 0.002
variance of B 0.001
variance of both 0.000049083678
standard deviation of A 0.040686128720965
standard deviation of B 0.026791075811268

cor-relation 0.000032
Regression
It is something in which we find out the relation between the variables to find the regression equation which is use to mak
Regression Equation
Slope
y -intercept

Variance of A 0.002
variance of B 0.001
variance of both 0.000049083678
standard deviation of A 0.040686128720965
standard deviation of B 0.026791075811268
cor-relation 0.000032
Mean A 972.979166666667
Mean B 1224.67416666667

Regression Another Example finding out the relation

Days Temp
1 21
2 22
3 23
4 24
5 25
6 26
7 27
8 28
9 29
10 30

from the graph we see (sales = 2x +18)

basically it is regression equation Y= slope+intercept it tells us
if temperature increase by 1 the sales will increase by 2 % or 2 times
i change the data to find out more in sales i reduce it from 58 to 50 so no confuse

sales = -1.5152x + 97.636

R² = 0.5739

The temperature(slope) value is in minus (-1.5151) so it shows that there is no

relation between sales and temperature if it is positive then vice versa

the regression equation sales = 2x+ 18 can be use to predic the sales as the change in
temperature(X) for example
X(temp) = 21 so what will be the sales ?
sales = 2(21) + 18 = 60
it is exactly the same as i put it my self

Hypot
A observation
January 858.69
Feburary 943.16
March 924.27
April 890.2
May 928.64
June 945.67
July 934.23
August 949.38
September 996.59
October 1043.16
November 1127.04
December 1134.72
Sum 11675.75

mean 972.98
variance 7574.91
std dev 87.03

count 12
degree of free dom 11
confidence(1-alpha) 99%
significance(alpha) 1%
critical T 3.11
standard error 25.12

lower limit 894.95

upper limit 1051.01

hypothesis 972
t value 0.04
p value 0.97
reject Null hypu with 0.03
 C

Monte Carlo Brownian Motion

This is use to estimate the Value of Risk and to fnd the stock price and stock return
normsinv(rand())(value always between -3 to 3)
0.11 January
-2.74 Feburary
-0.69 March
2.18 April
-1.76 May
1.13 June
-1.00 July
-1.72 August
0.44 September
-0.18 October
-1.43 November
0.21 December

Assumtion
Anual Expected Rtn / Drift 10%
Anual Volatility 40%
initial Stock 1134.72
Daily expected rtn/Drift/mean 0.000396825396825
Daily Volatility 0.025197631533949
Expected Rtn/ Drift (mean) 0.000079

brownian formula s=mean.stock price.time+votality.stock.(expected return)

GRACH(1,1) MODEL

Months
January
Feburary
March
April
May
June
July
 August
September
October
November
December

GARCH= GAMMA*long run VARIANCE + ALPHA*yesterday period return^2 +

Another Example for GARCH(1,1) for forecast future volatility

Months
1 January
2 Feburary
3 MARCH
4 APRIL
5 MAY

GARCH= GAMMA*long run VARIANCE + ALPHA*yesterday period return^2 +

by the above formula we find the variance for feburary by for up coming mo
GARCH(1,1)(VARIANCE)=LONG RUN AVERAGE+(ALPHA+BETA)^TIME*(YESTER

NOW THE SQRT OF VARIANCE IS THE VOLATILITY OR STD DEVIATION

Exponential Weight Moving A

Months
January
Feburary
March
April
May
June
July
August
September
October
November
December

We can find out the EWMA by 2 ways one the formula in red and another w
EWMA IS A TECHNIQUE A technique used in statistical quality contr
EWMA is also use to forecast the Volatility
 EWMA V

EWMA
Lamda 94%
1-lamda 6%
sum 100%

Last Variance 0.11

Last Votality 33.17%
Price January 858.69
Price Feburary 943.16
Daily log Rtn 9.38%

ewma (1-lamda)*daily log rtn^2+lamda*last variance

Updated Variance Est 0.103928221248017

Updated Volatility Estimate 32.24%

P/E ratio and P/E ratio multiple

TESCO price per share /

earning per share

Now i ahve to decide where to invest either Tesco or any other company like
that my invest coming out soon as compare to Tesco which is 14 times but b
FTSE 100 (this tell us about top hundreds company of UK if they are giving p/
go for the investment .

P/E ratio Multiple

Internal Rate of Return IRR

Cash Flow
 Present value & Future value
By this we get it know the present value of our investment and future value of the investment
Formula PV = FV(1+r)^-n
example
by manuplating the formula we can find out FV , R, and N also if u know any

Bonds

GILTS(TREASURY)
FOR EXAMPLE IF I WANT TO KNOW THE FIXED YEILD AT THE ABOVE PRICE OF THE BOND THEN HOW TO CALCULATE ?

PAR VALUE MEANS THE VALUE OF BOND

THIS 4.42% MEAN THAT THIS IS THE AMOUNT I WILL GET TILL THE END OF MATURITY DATE OF BOND BUT I IGNORE ONE T
THE TIME OF MATURITY I AM JUST GETTING £100 BACK NOT £113 SO IT MEAN THAT I AM GOING TO LOSE £13 IN 4 YEARS
SO IT MEANS EVERY YEAR I AM GOING TO LOSE £13/4 YEARS = £3.25 . SO IF THE AMOUNT I GETAS COUPON IS (£5 - £3.25
SO THE YEILD WHICH IS GETTING IS 1.55% ON EVERY YEAR SO AT THE END ON MY INVESTMENT ON BOND THE YEILD I AM

IF WE ARE WILLING TO PURCHASE THE BONDS FROM THE COMPANIES LIKE TESCO THE WE HAVE TO SEE ITS RATING FROM
S&P, MOODYS AND FITCH IF THE RATING IS CLOSER TO AAA THEN IT MEANS THAT THE COMPANY IS AS SAFE AS TEH GOV

BONDS YIELDS CURVE

IT TELL US THE RELATIONSHIP OF SIMILAR TYPES OF BONDS(LIKE EURO BOND ,GOVT BOND,CORPORATE BOND) WITH EAC
FOR EXAMPLE UK GOVT GIVING YEILD OF 5% ON 20 YEARS BOND AND FRANCE GOVT GIVING 8% YEILD ON 20 YEARS ,SO T
DIFFERENCE IN BETWEEN THEM IS KNOW AS SPREAD PLUS BEFORE GOING FOR INVESTEMENT WE HAVE TO SEE THE RATI
BESIDE THAT IT MAY BE POSSIBLE THAT THE UK GOVT WILL CUT INTEREST RATE DUE TO WHICH YEILD VALUE ON BOND CO
SO CONCLUSION BEFORE DOING INVESTMENT WE HAVE TO COMPUTE THE YEILD VALUE PLUS WITH THE HELP OF RATING

PAR VALUE MEANS THE VALUE OF BOND

THIS 4.42% MEAN THAT THIS IS THE AMOUNT I WILL GET TILL THE END OF MATURITY DATE OF BOND BUT I IGNORE ONE T
THE TIME OF MATURITY I AM JUST GETTING £100 BACK NOT £113 SO IT MEAN THAT I AM GOING TO LOSE £13 IN 4 YEARS
SO IT MEANS EVERY YEAR I AM GOING TO LOSE £13/4 YEARS = £3.25 . SO IF THE AMOUNT I GETAS COUPON IS (£5 - £3.25
SO THE YEILD WHICH IS GETTING IS 1.55% ON EVERY YEAR SO AT THE END ON MY INVESTMENT ON BOND THE YEILD I AM

IF WE ARE WILLING TO PURCHASE THE BONDS FROM THE COMPANIES LIKE TESCO THE WE HAVE TO SEE ITS RATING FROM
S&P, MOODYS AND FITCH IF THE RATING IS CLOSER TO AAA THEN IT MEANS THAT THE COMPANY IS AS SAFE AS TEH GOV

when we want to draw a graph of yeild curve the MATURITY (no. Of years come on X axis ) and Yeild curve value come on
Valuation of Bond

PV = PV OF PAYMENT + PV OF PAR VALUE

PV OF PAR VALUE = PV = FV(1+r)^-n

PV OF PAYMENT = C((1-(1+r)^-n)/(r))
current bond value
PV=399.27 + 680.58 1079.85

Data
future value 1000
interest rate/coupon 10%
maturity year /n 5
market rate of interest 8%
Annual Coupon payment 100

Bond Risk
bond
Longer maturity high
higher yeild high
higher coupon high
call option
put option
floating rate securities
c the video risk in bond investment

Duration Risk

Duration = Price when yeild decline - price when yield increase / 2*initial price(par value) * decimal change in yield

Bond initial price(par value) 100

yield actual 8%
Bond price after change in yeild 102
yeild change 8.50%
Bond price after change in yeild 99
yeild change 7.50%

duration 102-99/2*100*0.005
Duration value is 3 it means when 1% of yield increase the Value of bond will decrease by 3%
when YIELD increase price ofthe bond decrease so if 0.25% price increase of yield what % price decrease of bond
so if the 1% yield = duration 3% then the price decrease is = 0.25% * 3 which is 0.75% decrease in bond price

Dollar Duration it means for example i have £100 and duration is 3%,it means the value of £1
but i will say my dollar duration is £3 so in other words the amount decrease

Call Risk
It is a risk when u have callable bond issuer usually call ur bond when interest rate is low
forexample if u invest at the rate of 10% interest rate but some time now the interest rate is 6% the issuer will call ur bon
abd ask u to reinvest at the rate of 6% if u want so u get money back when u donot want it .
 Pre Payment Risk
It is just like Call risk the difference is that u get ur money back soon in the form of installment when interest rate is low
example mortgage back security

Bond Duration Calculation

Zero-Coupon Bond
Par Value £100
Maturity(years) 30

Yeild 4%
Duration -28.85
Actual -£30.12
Slope(Dollar Duration) 868.83

Duration Plot
2.00% -£54.88
4% -£30.12
6.00% -£16.53

Actual Bond
Yield Price
1% £74.08
2% £54.88
3% £40.66
4% £30.12
5% £22.31
6% £16.53
7% £12.25
8% £9.07
9% £6.72
10% £4.98

Durati
Duration and Convexity is measure to protect the portfolio from interest rate risk on fixed portfolio
Duration of a Bond
PV OF PAR VALUE = PV = FV(1+r)^-n

PV OF PAYMENT = C((1-(1+r)^-n)/(r))
Bond current value

Coupon rate = 3%
Coupon amount as per 3%*1000 30
Maturity (years) 20
Market rate (K) 4%
Bond Par Value 1000
Coupon Payment Annually
Duration of Bond Sum(PV)/Bond Current Value

1 2
Maturity (years)(t) cash flow(CF(£)
1 30
2 30
3 30
4 30
5 30
6 30
7 30
8 30
9 30
10 30
11 30
12 30
13 30
14 30
15 30
16 30
17 30
18 30
19 30
20 1030

Whats is the Price of Bond if Market Rate Cha

Bond current value = PV of par value + PV of Payment
PV OF PAR VALUE = PV = FV(1+r)^-n
PV OF PAYMENT = C((1-(1+r)^-n)/(r))
Bond current value
Coupon rate = 3%
Coupon amount as per 3%*1000 30
Maturity (years) 20
Market rate (K) 4%
Bond Par Value 1000
Market New rate of Interest 6%
Duration of Bond Sum(PV)/Bond Current Value

If Market Rate Change to 6% from 4% then what is the Bond Price

%P(percentage in price)= - Duration * (Market present rate - Market past rate )/1+Market past Rate)-->
The value of bond will decrease when interest rate go above from 4% to 6% by 0.29% as the value is in minus so it show it

The another way to find the change in price of bond (%p) is as follow
Modified Duration It is the duration which have unit in percentage where as Macorly Duration u
D*=D/1+MARKET PAST RISK

The percentage change in bond price(%p)

%p = - D* x (mkt present rate - mkt past rate)
New Price of bond £605.93

"MACAULAY BOND DURATION"

Duration= (1+y/y) - (1+y)+t(c-y)/c((1+y)^t-1)+y

In this formula we use only 3 variable

c = coupon rate
y = yeild maturity (market new interest rate)
T= time to maturity

Bond current value = PV of par value + PV of Payment

PV OF PAR VALUE = PV = FV(1+r)^-n
PV OF PAYMENT = C((1-(1+r)^-n)/(r))
Bond current value
Coupon rate(c) = 0.03
Coupon amount as per 3%*1000 30
Maturity (years)(T) 20
Market rate (Y) 0.06
Bond Par Value 1000

Duration of Bond 14.02

Annual Duration= (((1+y)/y)) - ((1+y)+t(c-y)/c((1+y)^t-1)+y)

(1+y)/y) 17.67
(1+y) 1.06
t(c-y) -0.6
c((1+y)^t-1)+y) 0.126214064166385

if duration is semi annually the only changes we have to do is to divide COUPON RATE AND M
and multiply maturity by 2

Convexity
Convexity measure the curvaure and basically it measure the change in duration

Bond current value £864.10

Coupon rate = 0.04

Coupon amount as per 3%*1000 40
Maturity (years) 4
Market rate (K)(yield) 0.05
Bond Par Value 1000
Convexity of Bond 18.71
Duration of Bond Sum(PV)/Bond Current Value

1 2
periods Cash flow(cf)
1 40
2 40
3 40
4 1040

Duration 14.02
Modified Duration
D*=D/1+MARKET PAST RISK 13.35

The percentage change in bond price(%p) whenthe yeild change by 1%

%p = - D* x (mkt present rate - mkt past rate) + (0.5 *convexity (Mkt new rate - mkt old rate ,change in yeild)^2

The new value of bond which become low because of increase in yeild by 1%

Chapter 7
forward contract
future contract
swap contract

Euro Dollar Future Contract

The Amount for future contract for Euro is 100,000 Dollar
Contract
LIBOR(%)
Sep-08 2.995
Dec-08 2
Result 0.995000000000005

Gain/Loss per 1bps

The 25 show us the difference in LIBOR rate decline 0.995 bps(base point) increase the price and give profit

The Value quote(rate) 97.005 we get it from the chart that is offered by market
The 97.005 rate is given for december 2008 in the month of september 2008
Libor (%) 100% - quote value
formula for 1 m 10000x(100 - month for taken the future contract(e.g 3)/months of year(e.g
number of months 3
1 years months 12

Chapter 8
Black Scholes Merton

Black Scholes Merton Model is use to calculate the option price of CALL and PUT options

Black Scholes Merton

Stock Price 10.00

Strike price 10.00
Volatility 0.30
Riskless Rate 0.04
Term (year) 1.00
Dividend Yeild 0.00

d1 0.28
d2 -0.02

Call Price £1.38

Out Price £0.98

Chapter 12
There are 3 approaches by which we can get VAR (1.Monte Carlo , 2 historical ,3 Volatility)

VAR ,Historical Simulation for Portfolio

For example i invest in 3 companies(portfolio) like Dawn , Geo and Duniya news channel £100 each , so i will calculate
VAR at 99% confidence that i will not loose much and 1% i loose very worst amount .

Dawn
Portfolio(Companies) £100
1-Nov 10
2-Nov 8
3-Nov 6
4-Nov 4
5-Nov 2
6-Nov 1
7-Nov 6
8-Nov 8
9-Nov 9
 10-Nov 10
Value at Risk (Var) @ 99% 1.09

This mean i have loose 28.37 pound from my total portfolio of 300 pound
In other word 9.46% investment is on Risk.
Monte Carlo Simulation VAR

normsinv(rand())(value always between -3 to 3)

0.22 January
0.70 Feburary
-0.18 March
0.90 April
-2.74 May
-1.52 June
0.56 July
-0.77 August
0.93 September
-1.93 October
1.00 November
2.47 December

Assumtion
Anual Expected Rtn / Drift 10%
Anual Volatility 40%
initial Stock 1134.72
Daily expected rtn/Drift/mean 0.000396825396825
Daily Volatility 0.025197631533949
Expected Rtn/ Drift (mean) 0.000079

brownian formula

Parametric (VAR) /Volatility

This is parametric Delta Normal VAR
VaR formula VAR = Z * volatility

PTCL
Date Stock Price taken from net

11/1/2011 718.42
11/2/2011 699.2
11/3/2011 699.35
11/4/2011 694.05
11/5/2011 689.96

Average
 Volatility
Z is the normsinv() value it tell for e.g i am confidence 95%
that my investment will have a lost so then Z calculate 5%
The Value of 5%/95% Z--->
The Value of 1%/99% Z--->
So put the value in VAR formula VAR = Z * volatility
So put the value in VAR formula VAR = Z * volatility

The value -1.81% tell me as per i am 95% sure that i will not lose my investment mor
The value -2.55% tell me as per i am 99% sure that i will not lose my investment mor

Chapter 13
Future Hedging / Contract

25000kg of copper company want to purchase so first contract

May-08
Spot 4.00
futures 3.80

Unhedged
Copper of hedging (KG) 25000
Cost 105000

Long Hedge
Number of Contract 1
Futures gain,per kg 0.40
Total Futures Gain 10000
net cost 95000

Basis Risk
Basis Risk Is called Mother of All Risk

25000kg of copper company want to purchase so first contract

May-08
Spot 4.00
futures 3.80
BASIS 0.20
Spot
Futures(gain/loss)
Total Cost

The main idea if BASIS as mentioned above it goes from 0.20 to 0.10 from may 2008-2009 it m
weaken it gives profit and when it strenghten or equal then our future contract give as LOST .f
it means this future contract will give us lost as mentioned below the chart

Long Hedge
Unexpected basis strengthening LOST
Unexpected basis weakening PROFIT
Unhedged
Copper of hedging 25000
Cost 95000

Long Hedge
Number of Contract 1
Futures gain,per kg -0.10
Total Futures Gain -2499.99999999999
net cost 95000

Hedge Duration

ZERO COUPON BOND

PAR VALUE/Face Value 100
Maturity years 30

Yield 4.00%
Duration -28.85
Actual -30.12
Slope

YIELD PRICE
4.00% £30.12
3.99% £30.21
DIFFERENCE (DV01) £0.09

Face
 (-) 1 bps (base point )

This hedging is not perfect for us because the BASIS risk is also not equal in option the difference value is £0.017 and in b

Optimal Number of futures contracts in a cross hed

CHANGE IN
FUTURES
Month Price(F)

1 2.00
2 3.00
3 -4.00
4 0.00
5 3.50
6 -3.00
7 -2.50
8 -3.00
9 5.00
10 -5.00
11 -4.00
12 -1.00

Volatility (STd Deviation) 3.38

correlation
(MV) Hedge Ratio (H) h= correlation(volat S/volat F)

Airline will Purchase (N) 1000000

NYMEX oil Futures per(Gallon)(Q) 42000
Number of Contract 16.25

Spot price of jet fuel £1.00

Futures price gain £1.51

Increase fuel cost 1,000,000

Gain on future Contracts 1,028,516

CHAPTER 14
Binomial for option price

The another way to calculate the option price is Bionomail Option Price method instead of Black Schole Model
1- call input
0= put 1
Assumption
Stock Price 30
Strike Price 30
Time(yrs)( 3 months) 90/360 days 1
Volatility 0.25
Risk free rate 0.10
Div Yield 0.02
Number of step 2.00
Time per Step(time/no. Of step) 0.50

Time Node
PUT (formula)= call - stock +(strike * exp(-rt))
Call Value (formula)= [up probability *option up + (1-up probability) * option down]* exp(-r*t)

Stock
Call Value
PUT Value

With the help of Binomial Option Pricing model we can predict the Stock , Call , Put option prices for any time period like i
it can be for whole year too by just changing the number of period and add 2 more step in it either upward(U) and downw

RHO Greeks
There are Black Scholes 4 types of GREEKS they are ( RHO,Delta,Vega and gamma)
Check the video and do check the website www.tradeking.com for becoming option king
The "Greeks" are a set of Black-Scholes values which measure the sensitivity of an option's price to changes in the option
The Greeks ( Delta , RHO,VEGA ,Theta,Gamma,d1,d2)
RHO is use to check how much price should increase or decrease of option (call and put) if 1% of interest rate increase of d

I Take Data from Below Table

RHO CALL FORMULA =STRIKE PRICE * EXP(-RT)*T*NORMSDIST(D2)
RHO PUT FORMULA = - STRIKE PRICE * EXP(-RT)*T*NORMSDIST(-D2)
Delta Greek

INPUTS
Stock Price(S) 10
Strike Price(K) 10
Volatility 0.3
RiskFree Rate (r) 0.04
Term Year (T) 1
DIV Yield 0

Black-Scholes(european CALL) 1.38

d1 0.28
DELTA = N(d1) 0.61
d2 -0.02
LONG # of Shares 61
Value of Long Shares £612
if i write 100 call option (short call option is 100)
SHORT# of Call Option 100
Value of Short Options £137.53
When i write 100 call option i got 61.2 Shares (100 * delta(0.612) by this formula and the price
It check the sesitivity with spot price
Portfolio(Stock-Options) £474.01

VEGA GREEKS

Vega is use to check the sesitivity in the change of option price when there is change come in volatility
what will be option price if 1% volatility is changes.

Hegher Volatility = Higher Option Price

c the excell sheet in which it is calculate on desktop

vega formula = Stock price * exp(-rt)*sqrt(t)*normsdist(d1)

Theta Greeks

Change is option price which the passage of time is called THETA GREEKS

Theta Call Option = (S*exp(-rt)*vol*normsdist(d1)/2*sqrt(t))+(r*S*exp(-rt)*normsdist(d1))-(r*k*exp(-

Theta PUT Option = (S*exp(-rt)*vol*normsdist(d1)/2*sqrt(t))-(r*S*exp(-rt)*normsdist(-d1))+(r*k*exp(-

Theta Call Option 0.926762342

Theta PUT Option 0.926762342353663

Gamma Greeks
The rate of change for delta with respect to
the underlying asset's price. Gamma is an
important measure of the convexity of a
derivative's value, in relation to the
underlying.

Gamma calculations are most accurate for

small changes in the price of the underlying
asset.

Chapter 15 (Marketin
Binomial Probability Distribution
Input Values
Number of Trial ( n ) 4
Probability of Success(p) 0.50
Probability of Not Success q=(1-p) 0.50

Number of attempts(X) Binomial Distribution

0.00 6.25%
1.00 25.00%
2.00 37.50%
3.00 25.00%
4.00 6.25%

Mean(np) 2.00
Variance=npq 1
Volatility/Std Dev=sqrt(npq) 1

Normal Approximation of Binomial Distribution

Suppose that 56% of the population of Pakistan voters favors a Imran Khan prime minister candidate. If a
random sample of 50 voters is choses, approximate the probability that fewer than 28 favor this
candidate.Use the normal approximation to the binomial with a correction for continuity

Input Variables
number of sample (n) 50
probability (p) 56%
not succes probability q=1-q 44%
mean(no.of success)(n*p) 28
variance(npq) 12.32
volatility(sqrt(npq)) 3.50998575495685
Probability less than 28 voter , so the formula will be
P(X<28)
P(X<= 27.5)= P(Z<= 27.5 -28/3.5) -0.1424 (Z SCORE)

Extreme Value Theory (EVT)

EVT is the another method to calculate VAR as VAR have 3 other methid too ( historical,montecarlo and parametric )

EVT have 2 approaches Block Maxima and Peaks over Threshold

Block Maxima approach divide the slot with respect to the time
and Threshold approach divide the slop with maximum lost
cheack the book chapter 15 page376
It is also we say it find the risk beyond the VAR

Expected Short Fall (also called Conditional VAR)

Bond face value £100

Probability of Default(PD) 2%
Probability of repay (p) 98%
Confidence 95%
Significance 0.05
Value at Risk 0.00
Expected Shortfall (ES) £40.00
VAR Weighted AVG £200.00

# of Default
90% 0
91% 0
92% 0
93% 0
94% 0
95% 0
96% 0
97% 0
98% 0
99% 1
100% 1

The normal distribution can also tell us about the expected short fall the second derivative of normal distribution is a expe

Chapter 16
 Mark to Market (MTM) Example Step by Step
In this MTM we are going to compute tha VAR .To Compute the VAR on currency forward contract
The first step is VALUE THE PORTFOLIO ,MAPPING THE VALUE ,GENERATE MOVEMENTS AND THEN COMBINE THE RISK
WITH THE VALUATION MODEL

Problem
Assume that on December 31,1998, we have a forward contract to buy £10 million in exchange
for delivering $ 16.5 million in three months. We use these definitions.

Quantity (Q)
F = current forward price
K = purchase price set in contract
f(t) = current value of contract.f(t)= SxP(*) -KxP
r(t) = domestic risk free rate
f(*) = foreign risk - free rate
T = time to maturity
p(t)=1/1+r(t)T (present value with domestic risk free)
p(*t)=1/1+f(*)T (present value with foreign risk free)
S = current spot price of the pound indollars

Mapping fixed Income portfolio

Bond #1
Face 100
Maturity(years) 5
Coupon 6%

Mapping a bond portfolio

Cash Flows
Term Bond#1
1 £6.00
2 £6.00

3 £6.00
4 £6.00
5 £106.00
Total

Colaterialized Debt Obligation

Investor Backed there security by 2 types of security one known as Mortgage backed Securities and another known as As

Mortgage Backed Security (MBS) we get our expected money from the people in the form of mortgage paym
Asset Based Security (ABS) we get our expected money from the people in the form of Credit card , de
MBS +ABS are kept in a same pool which is know as special purpose vechile because if any risk come it will be absorbed b
for e.g if any one donot pay his credit or mortgage payment then rest of the MBS and ABS cover the amount of default r

Types of MBS
1. Pass through In this type of MBS when mortgage payment come it come to the investor in
as group of investors buy the portion of mortgage investment and get there
2. Pre Paying In this type of MBS investor lose if interest rate come down because borrow
time , due to which investor loose the amount of interest which he calculate
3.Colaterailized Mortgage Obligation In this type of MBS it is further divided into 3 section namely Low risk, mediu
payment first but low as compare to medium risk holder and then paymnet g

The investor for avoiding the risk of principal and interest on mortgage , Inv
those who are interested in interest they invest in interest . So when interes
and when interest rate goes down those who invest on principal they get the

Gaussian Copula

Investopedia explains Copula

Copulas are a mathematical tool used in finance to help identify economic capital adequacy, market risk, credit risk and ope
Interdependence of returns of two or more assets is usually calculated using the correlation coefficient.
However, correlation only works well with normal distributions, while distributions in financial markets are mostly skewed
has been applied to areas of finance such as option pricing and portfolio value-at-risk to deal with the skewness.

What Does Copula Mean?

A statistical measure that represents a multivariate uniform distribution, which examines the association or dependence
between many variables. Although the statistical calculation of a copula was invented in 1957, it was not applied to financ

Normsinv = inverse of standard normal

Marginal (CDF)
Bond X (Chances of Default) 5%
Bond Y(Chances of Default) 5%
Correlation 0.3

Joint CDF 0.0750%

Gaussian Copula tell us what are the chances of 2 different bond simultaneous goes dafault (ITS IS FAILED)

Chapter 17
There are 2 types of Volatility
1. historical and
2. implied Volatility

Implied Volatility

Focasting of volatility is called implied Volatility (ewma , garch(1,1))

We are using Black Sholes model to check the CALL option price as it depend on volatility
so here are the data which was taken by google stock index

today date 2/6/2008

expire date of call option 3/21/2008
days difference 33
Actual Call option price £32.40

Black -Scholes Inputs

Stock(S) 505.15
Strike(K) 500
Volatility 39%
Riskfree rate(r) 3.30%
Term(T) 33/250 0.132
Div Yield 0
d1 0.111487249972825
d2 -0.031813760596543
CALL PRICE after calculation of Black.s £32.40

The actually CALL Option price for today date is £32.40 so we have to find the difference in
volatility which can bring our £18.49 to £32.40 at themoment volatility 20% so after using the build in
function (Goal Seek )of excell we can find out the volatility which i will write just beside to Volatility

Chapter 18
Securitization

Securitization is basically structured and non structured finance which are divided in to 3 parts

1 Pool Assets
2. Transfer (De link_ Credit Risk in it we use special purpose vehicle(SPV) as use in Morgage backed security
3. Tranching of Liabilities.

Special Purpose Vhecle (SPV) it canbe pledge /resell/exchange assets

Special Purpose Vehicle

Assets Cash Flows---------------> 400

Tranching Securitization

Tranching :- It help in preservation principle ( Market Value , Cash Flow and risk )
 Collateral (Income) Tranches (Liabilities)
100 6% £50 L
flow------------------> £50 12%-L

L(LIBOR)= 6%
THE HIGHER INVESTOR (HIGH RISK TAKER ) INVEST £50 AND GET THE INTEREST ON THE BASE OF L(LIBOR)
The LOWER INVESTOR (LOW RISK TAKER ) INVEST £50 AND GET INTEREST ON THE BASES OF 12%-L(LIBOR)
NOW LIBOR IS 6% SO WHAT WILL INVESTORS GET FROM THE AMOUNT (CASH FLOW) WHICH COME FROM THE INVESTME
LIBOR 6%

CASH FLOWS Tranches ( lliabilities)

£6.00 3
3
£6.00 6

Preservation of Risk

Duration £D £D
4.5 450

By the above calculation we try to find the market value of bond , then safe the Cash Flow and
protect the investment by Dollar Duration .

Chapter 19 (CREDIT RISK MANGEMENT

Expected Loss when Probability of Default and Loss Given Default are correlated
EXPECTED LOSS:

Adjusted Exposure(AE) £10,000,000

Expected Default Frequency(EDF) 1.00%
Standard deviation of EDF 9.95%

Loss given default (LGD) 75%

standard deviation of LGD 25%
Expected Loss =(AE)(EDF)(LGD) £75,000.00

Correlation (EDF,LGD) 50%

Covariance 0.012
EL(correlated EDF &LGD) 1.99%
Expected Loss=AE*EL £199,373

expected loss with correlation of 50% if i make it 0% then the expected loss will be £ 75000 so as much i ch
 Implied Probability of Default

Probability of Default Implied by Spot Rate

Spot Rates
Year 1
Treasury (i)(Govt Bond) 4%
Corporate (k)(corporate bond ) 4.80%

Probability of Repay (p) 99.237%

Probabillity of Default (1-p) 0.763%

Beta Distribution of LOSS GIVEN DEFAULT (LGD)

Im this type of distribution we required only 2 parameter which are

Junior
Alpha (A) 2%
Beta (B) 6%
Mean Recovery 25.00%

The Junior show recovery of 25%-100%= 75% which is according to BASEL 2 is not acceptable where as
Senior Show recovery of 100%-54.79% = 55.31% which is good recovery of investment .

Expected Value

Problem:
An insurance policy cost £800.Based of past research
a average of 1 in 50 people will file a clain of £10000.
an average of 1 in 100 people will file a claim of £20000 and
an average of 1 in 250 people will file a claim of £50000.
what is expected value to the company per policy sold ?
If the company sells 10,000 policies what is the expected profit or loss?

Answer
It is confirm for getting the policy every one have to pay £800 so the probability is 100% mean 100/100 where 1/50 people
and 1/100 people ask for 20000 and 1/250 ask for 50000 so by multiply the Gain and Probability and then sum them all we

GAIN 800
Probability 1.00
Product 800
SUM to know either loss or gain 200.00

So know we will multiply our gain with numbers of policies which we sell that is 10,000
So overall we gain the profit of 2 million .

Chapter 20 (Measuring Actual De

Rating Agencies
S&P, Moodys (USA company) Fitch (European)

They particulary tell us about Corporate Bond(Debt) and Soverign Bond(Debt) rating
They take money from corporate to rate their debt(bond) where as from govt they donot take money .

S& P rating AAA is the highest usually for govt

and lowest is D (means u are unable to pay the debt back )

Cummulative Probability of Default of risky bond

Probability of Default Implied

Spot Rates
Year 1
Treasury (i)(Govt Bond) 4%
Corporate (k)(corporate bond ) 5.00%

Probability of Repay (p) 99.0%

Probabillity of Default (1-p) 1.0%

Cummulative Probability of Default(CP)

Cummulative Probability Default(CP) 3.70%
So there is chance of not recovery the amount is 3.70%

Bankruptcy process
The Steps of Bankruptcy Process from Start to Finish
1. Electronic Filling
2. Automatic Stay
3. Trustee hearing / Creditor Hearing
4. Chapter 13 case confirmation ,objection by trustee - 60 days
5. pre discharge certificate
6. Order of Discharge chapter 7 / Chapter 13

Chapter 21
Deafult Risk is also called credit risk when creditor unable to pay back the maount
Credit rating if low then higher probability of default
The higher the credit risk then higher the interest rate

Stock Value

Share price £24

dividend/year £2
expected stock price in3 years £25
Discount/expected rate 11%

Net present value of Stock dividends *(1+discount rate)^1-n

Stock Value £27.41

Expected Return on Loan

formula ---> E(r)=P(1+K)-1

DATA
Probability of Return(p) 96.00%
probability of default (pd) 4.00%
Contractually promised return on loan(k) 9.00%
Expected return on loan(R) 4.64%

as per promised return on loan (p*k) 8.64%

As per contract i was expecting 8.64% but unfortnately i am getting 4.64%

Risk Adjusted return on Capital (RAROC)

What Does Risk-Adjusted Return On Capital - RAROC Mean?

An adjustment to the return on an investment that accounts for the element of risk. Risk-adjusted return on capital (RAROC
gives decision makers the ability to compare the returns on several different projects with varying risk levels.
RAROC was popularized by Bankers Trust in the 1980s as an adjustment to simple return on capital (ROC).

formula = Revenue-expenses +ROC-EL/EC

Economic Capital(EC) (formula) CVAR - EL(expected loss)

RAROC (Data Entry)

Loan Portfolio (LP) £1,000
Annual Rate (AR) 9%
Loan Revenue(Loan portfolio*Anal Rate) £90

EC against Loan 7.50%

EC (£)(LP* EC against Loan) £75.00
EC Invested in Govt @ 6.50%
Return on EC (ROC)-> EC*EC rate £4.88

Deposits £1,000
Interest on Deposits 6%
Interest Expense(deposit*Interst Depsit) £60

Expected Loss (%) 1%

Expected Loss (£)(LP * EL%) £10

Operating Cost (£) £15

expenses= operating cost + Iterst expnse £75

Standard Approach of Basel 2

credit rating , Risk weight assets , charge

it tell how much capital we have to keep against the loan a bank alotto a creditor

Chapter 22
Adjusted exposure EL=AE x LGD x EDF(Probability of Default)
AE = Outstanding amount which user have to the bank

Expected Loss
Commitment (COM) £10,000,000
Outstanding (OS) £5,000,000
Unused Commitment (UCOM) £5,000,000

Rating Equivalent BBB

UGD (Alpha) 65%
Adjusted Exposure (AE) £8,250,000

AE formula ( Outstanding (OS) +UGD(Alpha) x Unused Commitment (UCOM)

Credit Default Swap

It is risk which wetake that cannot be happen like Katia house hit by astronaut and the insurance company pay them 5 mil
just like lehman brothers take a default risk cover from the AIG and in 2008 lehman brother collapse and AIG suppose to g
basically insurance company / bank do the insurance of the company credit default .

Interest Swap
Company B want to borrow 5 million Dollar but the bank offer it if u want Variable rate then u have to pay ( LIBOR + 1%) o
Company A want to borrow 5 million Dollar but the bank offer it if u want Variable rate then u have to pay ( LIBOR) or fixed

Now swap bank try to help both the companies by exchanging their rate if offer company B , I pay your LIBOR but in reply
and BANK offer company A u pay me LIBOR in a reply i pay you 8% interest rate on 5 million .

Now what happen next if both the companies agreed then Company B have to pay 8.5% to SWAP BANK and in reply it will
Pay 1 % as per the agreement with the another bank so in total company B pay only 9.5%(8.5% +1 %) .

Where as company A give LIBOR amount to SWAP bank and get 8% from SWAP bank , as company A fixed rate was 7% bu
variable rate which is only (LIBOR ) so in a reply SWAP bank giving 8% which is 1% extra coming to company A fixed rate so
where as Bank is making 0.5% money as the LIBOR which come to SWAP bank from company A its go directly to Company
giving SWAP BANK only forwarding 8% so fro there its making 0.5% money .

How to Calculate Interest Rate Swap

Assumptions LIBOR CURVE

Notional(Amount) 100 3 Months
Received Fixed 8.0% 6 Months
9 Months
12 Months
15 Months
One party pay Only LIBOR (Variable Rate)every 6 months and another party pay 8%(Fixed Rate) interest rate

LIBOR
TIME RATES
0.25 5.00%
0.75 6.00%
1.25 7.00%

Receive Fixed Cash Flows(pricing bond)

FV (Future Value)(notional(amt) *0.08/2) (PV)(FV *exp(-LIBOR rate* Time)
4 3.95
4 3.82
104 95.29

Total 103.06

Value (SWAP)= 103.06 - 101.47 1.59

Currency Swap
Curency swap is a swap in which we swap principle (currency) with fixed interest rate.
basically if USA based company is in france an it want loan of 20 M dollar instead of taking from from french bank they tak
but received the amount in France where on the other way around if french company which is based in USA want loan of
french bank instead of USA bank so that they will get 30 M euro in USA . And obviously another way around the interest ra

To avoid a exchange rate risk mostly bank do such a swap to protect there principle from the exchange rate risk

Chapter 23
Credit Spread Options
The Difference between risk free bond (Govt or Treasury Bond ) and Corporate Bond (Risky Bond) is known as Credit Sprea

For example
The Coupon of Corporate Bond is 6%
The Govt bond Coupon is 5%
The Credit Spread Option is 1%

Strike Spread = It is a fixed spread at the time of purchase of option

Credit Spread Put Payoff = Duration x Notional Amount x MAX ( Credit spread - Strike Spread,0)
Credit Spread Call Payoff = Duration x Notional Amount x MAX ( Strike spread - Credit Spread,0)
If credit spread increase then Credit Put have the profit else Credit Call have the profit

Calculation
Strike Spread 2%
Notinal Amount £100
Time Duration 4
The Coupon of Corporate Bond is 6%
The Govt bond Coupon is 5%
The Credit Spread Option is 1%

Credit Spread Put Payoff = Duration x Notional Amount x MAX ( Credit spread - Strike Spread,0)
Credit Spread Call Payoff = Duration x Notional Amount x MAX ( Strike spread - Credit Spread,0)
Credit Spread Put Payoff £0
Credit Spread Call Payoff £4

Chapter 24

Credit Metrics
watch the video There are 4 steps in credit metric
step 1 (transition or migration matrix) In this step we see the migration of rating for example what is the possiblity
step 2 specify the horizon ( it is the time period like for how long probability of bon
Step 3 Find the one year forward spot rate with the help of rating agency we can fin
step 4 In this step we compute the bond value and find out the future value of bon
So credit Metrics purpose is to find out the bond rating and value either it is increasing or decreasing for e.g from BBB to A

Chapter 25 (Operational Risk )

There are 4 types of operational risk ( people, process,system and external risk )

Operational Risk Have 2 approaches BIA(Basic Indicator Aprroach and Standard Approach

Basic Indicator Approach (BIA)

Gross Operating Income (GOI)
Business Line year - 3 (year minus 3)
Corporate Finance £20
Trading and Sales £20
Reatils Banking £20
Commercial Banking £20
Payments and Settlement £20
Agency Services £20
Asset Management £20
Retail Brokerage £20
Bank £160
Treat Negative £160
Capital Requirement

Unexpected Loss
It is a loss which is happen at 99.99% confidence, it is to some extend VAR approach in which we check the maximum loss
EL = expected loss, PD = probability of default , AE = Adjusted Exposure , LGD = Loss given default .
UEL = Un Expected Loss ?

Adjusted Exposure £8,250,000

Probability of Default (EDF)(PD) 0.15%
Loss Given Default (LGD) 50%
Std Deviation of EDF 3.87%
Std Deviation of LGD 25%
Expected loss £6,187.50
Un expedted loss £178,507.68

UEL = AE x sqrt(PD X VARIANCE(LGD) + LGD^2 X VARIANCE (PD))

VARIANCE(PD) = PD X ( 1 - PD) 0.149775
Variance(LGD)= LGD x (1 - LGD) 0.0625
 Operational Risk Life Cycle
Step1 Define Risk Category (Business Line , Locational and Legal)
Step2 Caputuring Loss Data internal and external , by regression
Step3 expected loss (what we are expecting loss ,and define threshold)
Step4 Causes in control (Analyse the data )
Step5 Base on loss data calculate economic capital
Step6 report the losses for comparing what u expect and what u got
Step7 and at last redefine the control and causes

Chapter 26
Liquidity Adjusted Value at Risk (Relative VAR and Absolute VAR )
Spread = if spread is greater than there is less liquidity in the instrument

Wealth (W) 1000000

Volatility (sigma) 30%
Expected Return (u) 10%
Confidence 95%
N Dev(Critical z)normsinv(confidence) 1.64

Relative Value at Risk (%) 49.35%

Relative Value at Risk (£) £493,456.09

Absolute Value at Risk (%) 39.35%

Absolute Value at Risk (£) £393,456.09

Spread (mean)
Spread (Std Deviation)
Worst expected spread Spread + STD (spread)* N Dev

Liquidity Value at Risk(%)-Static Spread

Liquidity Value at Risk(%)-Volatile Spread

LVAR(static spread) = - (expected return) + (vol(sigma) * N Dev (Critical_z)) +(1/2)*Spread

LVAR(volatile spread) = - (expected return) + (vol(sigma) * N Dev (Critical_z)) +(1/2)* Worst Spread

Chapter 27 & 28
BASEL II Over view

formula for Basel 2 Total Capital

Risk Wgt Avg RWA(Credit Risk)+(Market Risk *12.5)+(Operational Risk
It is divided into 3 pillars (1st pillar Minimum Capital , 2nd pillar Supervisor Review , 3rd Pillar Market Discipline)

Loss Distribution Approach (LDA)

LDA is a combination of 2 distibution ons is known as loss frequencies and another known as loss severities
In Loss Frequencies distribution it calculate the number of LOSS Events in particular interval of time
In Loss severity it describe the size of the loss when it occurs.

Frequency Distribution
Probability Frequency
0.5 0
0.3 1
0.2 2
Expectation(N) 0.70

Expected Loss = E(N) * E(X)

Unexpected Loss = Amount - EL

Chapter 29 ( Investment Risk Management )

Marginal Value at Risk

Marginal VAR or marginal risk tell the change in risk due to small increase or derease in any allocation

Inputs CAD (Canadian Dollar)

Position $200
Volatility 5%
Total Portfolio $300
Correlation 0

Confidence 95%
Norms Inverse/ Critical Z 1.64

VAR- Covariance 0.0025

Matrix 0

Var- Covar Matrix

X'
200.00 100.00
 [X
0.50
1.44

Portfolio
Variance
Volatility
VAR

Positions
Positions
Volatility
Covariance

Individual VAR

Beta

Marginal VAR
formula

Chapter 30 hedge funds

What Does Hedge Fund Mean?
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investor

Investopedia explains Hedge Fund

For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is t
 beta A beta of 1 indicates that the security's pric
A beta of greater than 1 indicates that the se

mean
972.98 -114.29
972.98 -29.82
972.98 -48.71
972.98 -82.78
972.98 -44.34
972.98 -27.31
972.98 -38.75
972.98 -23.60
972.98 23.61
972.98 70.18
972.98 154.06
972.98 161.74
0.00

64.59 0.0407

0.0218 2.18%
, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing mo

expected rtn - risk free mkt rtn-risk free

rp=return portfolio rb return of bench mark

expected rtn - risk free

portfolio rtn / beta (high trymor high performance)The Treynor ratio relates excess return over the risk-free rate to the ad
portfolio rtn/volatility(high sharpe high perform) The Sharpe ratio is used to characterize how well the return of an asset
portfolio rtn -(excess rtn)* beta This is the difference between a fund's actual return and those that cou
jenson alpha/ tracking error The information ratio (IR) measures a portfolio manager's ability to gen
jenson alpha formula is also (portfolio expected return - CAPM )

Chapter 2
 Chapter 2
distribution
distribution chracterize random variable in other words it prove randam
tell us abt the quality of any distribution
is known as mean
is known as variance when we take the square root it become standar
is known as skewness.the skewness of the dataset indicates whether d
is known as kurtosis (if it is greater then 3 is known as laplace distributi

probability mean variance

10% 85.87 964.53
20% 188.63 177910.16
30% 277.28 256282.51
5% 44.51 39622.80
4% 37.15 34494.89
4% 37.83 35771.67
1% 9.34 8727.86
3% 28.48 27039.67
6% 59.80 59591.50
5% 52.16 54409.14
4% 45.08 50808.77
8% 90.78 103007.16
100% 956.90 848630.65

this tell us that std deviation(volatility) is positive toward the mean

this tell us it is normal distribution and near to the mean

tion (gordon growth)

rate give to its share holder

s= price of stock , d =next dividend ,r = required rate,g = expected growth (with the help of this formula u can find out s,d,

risk free +beta *MRP

current Div *(1+expected dividend)

s=d/r-g
Lognormal Distribution
it's value always above zero
with the help of this we can find out future stock price level .in log normal price never goes below zero
s1 is future stock price and s0 is the last day stock price and r is the rate of return of market all of this is normal distributio
data taken from above
Assume
mean 0.08
volatility 0.40

curent dividend *(1+expected dividend)

next dividend/ req rate of rtn - expected dividend growth

s0*exp(rate rtn * time)

s0*exp((rate rtn - volatility^2/2) * time)

NORMSINV(0.5+B111/2)
NORMSINV(B111) where b111 is 95%

so*exp((return-sigma^2/2)*T-sigma*two tail*sqrt(T))
so*exp((return-sigma^2/2)*T+sigma*two tail*sqrt(T))

so*exp((return-sigma^2/2)*T+sigma*one tail*sqrt(T))
stock price - VAR(lower) This mean there are 5 % chances of having th

random rtn future price

0.19 56.89
0.40 75.41
0.00 #VALUE!
0.00 0.26
0.00 0.07

This distribution is use when we donot know variance and volatility and plus the sample is small or observation is small

periodic return

0.09
-0.02
-0.04
0.04
0.02
-0.01
0.02
0.05
 0.05
0.08
0.01

MEAN FOR GOLD PRICE 972.98

STD DEV FOR GOLD PRICE 87.03
lower limit gold prc 914.51
upper limit gold prc 1031.45

TINV(significance,no.pf periodic return-1)

mean-critical T *Std Deviation/ sqrt(no pf periodic return),

mean+critical T *Std Deviation/ sqrt(no pf periodic return)
so lower limit is (0.2)% and upper limit is (5.3)%

variance & Correlation between Assets

ce and can be find out easily with the help of excell function covar(log periodic return of asset A , log periodic return of asset b)
ormula is covariance(A,B)/std deviation of A * std deviation of B)

ovariance and then correlation

log return variance

0.09 0.005
-0.02 0.002
-0.04 0.004
0.04 0.000
0.02 0.000
-0.01 0.001
0.02 0.000
0.05 0.001
0.05 0.000
0.08 0.003
0.01 0.000
0.03

covariance(ab)/stddev A * stddev B
 Chapter 3

o find the regression equation which is use to make the predictions

y= byx X + ayx
byx = ( sy/sx) r sy = std dev of Y , sx = std dev of X and r = correlation
ayx= Y -byx X Y = mean of Y, X = mean of X

Regression y= byx X + ayx 972.98

Slope byx = ( sy/sx) r 0.00005

y -intercept ayx= Y -byx X 972.92

er Example finding out the relation ship between temperature and sales
Sales
60

Sales
62 110
64
100
66
68 90
70
72 80
f(x) = 2
74 R² = 1
70
76
78 60

50

40

30

20
20 22

SUMMARY OUTPUT

Regression Statistics
he change in Multiple R
R Square
Adjusted R Square
 Standard Error
Observations

ANOVA

Regression
Residual
Total

Intercept
Temperature

Hypothesis Testing

tinv(significance,degree of freedom)
std dev/ sqrt (count)

mean - critical t * std error

mean + critical t * std error

By doing this test we get it know the prediction of hypothesis value 972
so the it means we cannot refuse hypothesis peridic value if rejection is
96.96 %
3.04 %
 Chapter 4
This is use to estimate the Value of Risk and to fnd the stock price and
ian Motion normsinv mean inverse of normal distribution

expected stock (Price) log return 1200.00

1138.20 0.00
1062.66 -0.07
1044.78 -0.02 1150.00
1104.28 0.06
1056.90 -0.04
1087.76 0.03 1100.00
1061.17 -0.02
1016.64 -0.04
1050.00
1028.26 0.01
1023.94 0.00
988.12 -0.04 1000.00
993.88 0.01

950.00

900.00
1 2 3 4

Anual expected rtn/252(working days)

Anual Volatility / sqrt(252)
daily expected -0.5 * daily volatility ^2

otality.stock.(expected return) 3.31

Chapter 5
This is use to forcast thefuture volatility
ODEL

A observation period return period return ^2

858.69 0.09 0.0088
943.16 -0.02 0.0004
924.27 -0.04 0.0014
890.2 0.04 0.0018
928.64 0.02 0.0003
945.67 -0.01 0.0001
934.23 0.02 0.0003
 949.38 0.05 0.0024
996.59 0.05 0.0021
1043.16 0.08 0.0060
1127.04 0.01 0.0000
1134.72
0.0021

VARIANCE + ALPHA*yesterday period return^2 +BETA * yesterday variance

r forecast future volatility

A observation period return period return ^2

858.69 0.09 0.0088
943.16

VARIANCE + ALPHA*yesterday period return^2 +BETA * yesterday variance

nd the variance for feburary by for up coming months we can use another formula which is as follow
ONG RUN AVERAGE+(ALPHA+BETA)^TIME*(YESTERDAY VARIANCE - LONG RUN AVERAGE)

NCE IS THE VOLATILITY OR STD DEVIATION

Exponential Weight Moving Average (EWMA)

Lamda 94.00%
EWMA 0.11%
Price of Yen Against Pak Ruppes period rtn period rth ^2
858.69
943.16 0.09 0.88%
924.27 -0.02 0.04%
890.2 -0.04 0.14%
928.64 0.04 0.18%
945.67 0.02 0.03%
934.23 -0.01 0.01%
949.38 0.02 0.03%
996.59 0.05 0.24%
1043.16 0.05 0.21%
1127.04 0.08 0.60%
1134.72 0.01 0.00%
ewma=lamda*yesterday variance(january)+(1-lamda)*yesterday period rtn^2

A by 2 ways one the formula in red and another way is to sum the variance as i have done in yellow block G367 which is 0.11%
A technique used in statistical quality control to monitor the output of a business or manufacturing process by tracking
ast the Volatility
 EWMA Versus Garch(1,1)

Garch(1,1)
beta 94.00%
alpha 3.00%
gama 3.00%
sum 100.00%

taken from above data Last Variance 0.11

Last Votality 33.17%
w(omega) 0.0033

amda*last variance Garch(1,1) omega+alpha*daily log rtn^2+beta*last varia

variance est 0.11

volatility est 32.71%

Chapter 6
it is use to find out either company share is cheap or expensive and wh
tio multiple

420 penny 14.00

30 penny

e to invest either Tesco or any other company like Sainsbury it may be possible Sainsbury P/E giving 13 times so it mean
soon as compare to Tesco which is 14 times but before deciding this also i have to see top 100 companies what they are offering
top hundreds company of UK if they are giving p/e higher then i have to decide the reputation of tesco and sainsbury and then

This mean that ur earing per share will have out put of the multiple of some number like for example (Intel 100) this mean
if u invest in intek for example 1 pound in a reply u will get earning 100 times of ur investment, usually IT company have a
output so high but rule of thumb say less P/E ratio is the best place to invest

It is use to evaluate the project where to invest , any project whose IRR
turn IRR it calculate internal rate of interest

cash flow is the input and output of the cash in the business (input getti
liabilities like loan, salaries and etc
ure value
lue of the investment
FV = future value , r = rate of interest and n = number of years
fv= 100 , n = 7 , r = 7% pv 100(1+7%)^-7
a we can find out FV , R, and N also if u know any 3 variables.
680.58
Bonds
COUPONS MATURITY YEAR PRICE OF BOND
5% 2014.00 113.00
E OF THE BOND THEN HOW TO CALCULATE ?

FIXED YEILD COUPON/

PRICE OF BOND
£100
FIXED YEILD(FY) (5/113)*100
OF MATURITY DATE OF BOND BUT I IGNORE ONE THING
MEAN THAT I AM GOING TO LOSE £13 IN 4 YEARS TIME IF I PURCHASE BOND IN YEAR 2000.
O IF THE AMOUNT I GETAS COUPON IS (£5 - £3.25 /113)*100 = 1.55%
ND ON MY INVESTMENT ON BOND THE YEILD I AM RECEIVING IS ONLY 1.55%

IKE TESCO THE WE HAVE TO SEE ITS RATING FROM RATING AGENCIES LIKE
ANS THAT THE COMPANY IS AS SAFE AS TEH GOVERNMENT AND ETC

CURVE
BOND ,GOVT BOND,CORPORATE BOND) WITH EACH OTHER
RANCE GOVT GIVING 8% YEILD ON 20 YEARS ,SO THE
NG FOR INVESTEMENT WE HAVE TO SEE THE RATING OF BUT THE GOVT'S BOND
ST RATE DUE TO WHICH YEILD VALUE ON BOND COME DOWN AND FRANCE GOVT NOT DO SO .
HE YEILD VALUE PLUS WITH THE HELP OF RATING AGENCY CHECK THE WORTH OF BOND ISSUING AUTHORITY.

FIXED YEILD COUPON/

PRICE OF BOND

FIEXED YEILD(FY) (5/113)*100

OF MATURITY DATE OF BOND BUT I IGNORE ONE THING
MEAN THAT I AM GOING TO LOSE £13 IN 4 YEARS TIME IF I PURCHASE BOND IN YEAR 2000.
O IF THE AMOUNT I GETAS COUPON IS (£5 - £3.25 /113)*100 = 1.55%
ND ON MY INVESTMENT ON BOND THE YEILD I AM RECEIVING IS ONLY 1.55%

IKE TESCO THE WE HAVE TO SEE ITS RATING FROM RATING AGENCIES LIKE
ANS THAT THE COMPANY IS AS SAFE AS TEH GOVERNMENT AND ETC

rs come on X axis ) and Yeild curve value come on Y axis

ond
 680.58

399.27
1079.85
> This is the value of the bond if you want to sell when the interest rate decrease from 10% to 8%
so the motive of the story is that when interest rate increase of the market the value of the bond decrease and if interest
as the case we solve it shows the time when th ebond purchase the interest rate was 10% but the currently the interest ra
FV
I
N
r
C

interest rate risk

high
low
low
low
low
low

price(par value) * decimal change in yield

3
d will decrease by 3%
e of yield what % price decrease of bond
hich is 0.75% decrease in bond price

e £100 and duration is 3%,it means the value of £100 will decrease 3% is £97
ation is £3 so in other words the amount decrease is known as Dollar Duration

erest rate is low

w the interest rate is 6% the issuer will call ur bond and pay u par value of bond
en u donot want it .
he form of installment when interest rate is low

Bond Duration Calculation

minus maturity /1+yield

parvalue*exp(-(yeild+1)*maturity)-parvalue*exp(-yeild*maturity)

Duration= (1+y/y) - (1+y)+t(c-y)/c((1+y)^t-1)+y

£80.00

£70.00

£60.00

£50.00

£40.00

£30.00

£20.00

£10.00

£0.00
0% 2% 4% 6% 8% 10%

Duration Calculation
rate risk on fixed portfolio

£456.39

£407.71
£864.10
 14.91 years
This value show the duration of bond , 14.91 is the effective maturity of the 20 years bond
3 4 5=3x4
t x CF (1+r)^-n PV
30 0.9615 28.85
60 0.9246 55.47
90 0.8890 80.01
120 0.8548 102.58
150 0.8219 123.29
180 0.7903 142.26
210 0.7599 159.58
240 0.7307 175.37
270 0.7026 189.70
300 0.6756 202.67
330 0.6496 214.36
360 0.6246 224.85
390 0.6006 234.22
420 0.5775 242.54
450 0.5553 249.87
480 0.5339 256.28
510 0.5134 261.82
540 0.4936 266.56
570 0.4746 270.55
20600 0.4564 9401.57
Sum 12882.39

ice of Bond if Market Rate Changed(with the help of Duration )

£456.39
£407.71
£864.10

14.91

t rate )/1+Market past Rate)--> -0.287

6% by 0.29% as the value is in minus so it show it will reduce

ve unit in percentage where as Macorly Duration unit is always in years but have slightly difference
 14.939

-0.299

AY BOND DURATION"

£311.80
£344.10
£655.90

14.02 years

3.64

o do is to divide COUPON RATE AND MARKET RATE (YEILD RATE ) BY 2

Convexity

£864.10 convexity formula 1/p(1+y)^2

 1/p(1+y)^2 0.00104968
Sum Column(5) 17820.73

according convexity formula mulitiply both above value

14.02

3 4 5
PV of CF (cf/1+yeild(mkt rate)^n(period) t^2+t 3x4
£38.10 2.00 76.19
£36.28 6.00 217.69
£34.55 12.00 414.64
£855.61 20.00 17112.21

Sum 17820.73

w rate - mkt old rate ,change in yeild)^2 -0.1326

749.53

Chapter 7

e Contract

Quote Price
97.005 992512.50
98 995000.00
2487.50

25.00
bps(base point) increase the price and give profit $ 2487 and the vice versa

market
ken the future contract(e.g 3)/months of year(e.g 12) x (100 - Quote))

Chapter 8

and PUT options

Formula
So = Stock Price
d1 = (ln(So /K)+(r + (vol ^2/2)))*T K = Strike Price
Vol *sqrt(T) d = discount
vol = volatility
d2 = d1 - Vol *sqrt(T) N = Normal Distribution
r= riskless rate
Call Price= So N(d1)-K*exp(-rT) *N(d2) T = Time /Term
Put Price=K*exp(-rT) *N(-d2) - So N(-d1)

Chapter 12
orical ,3 Volatility)

n for Portfolio

a news channel £100 each , so i will calculate

rst amount .

Geo Duniya Portfolio

£100 £100.00
5 28.00 43.00
3 22.00 33.00
1 16.00 23.00
-1 10.00 13.00
-3 4.00 3.00
-5 -2.00 -6.00
-7 -8.00 -9.00
-9 -14.00 -15.00
-11 -20.00 -22.00
 -13 -26.00 -29.00
-12.82 -25.46 -£28.37

total portfolio of 300 pound

ent is on Risk.
ation VAR

expected stock (Price) log return

1141.41 0.01
1162.07 0.02
1157.30 0.00
1184.39 0.02
1105.91 -0.07
1064.88 -0.04
1080.51 0.01
1060.20 -0.02
1085.80 0.02
1034.79 -0.05
1061.71 0.03
1130.38 0.06

Anual expected rtn/252(working days)

Anual Volatility / sqrt(252)
daily expected -0.5 * daily volatility ^2

s=mean.stock price.time+votality.stock.(expected return) 3.31

Volatility

Periodic Rate of Return

(ROR) ln(stock tomorow/stock yesterday)

0.50%
-2.71%
0.02%
-0.76%
-0.59%

-0.71%
 1.10%

-1.64485362695147
-2.32634787404084
-1.81%
-2.55%

t i will not lose my investment more that -1.81%

t i will not lose my investment more that 2.55%

Chapter 13
Contract

25000 KG

May-09
4.20
4.20

if price increase from 4.00 to 4.20 then 25000kg * 4.20

the difference between future price (3.80)may 2008 - spot price may 2009 (4.20)
so the saving is the difference in rate (0.40) * number of weight KG of copper
The net cost is future price * the quantity of copper required 25000

25000

May-09
3.80
3.70
0.10
-3.80
-0.10
 -3.90

0.20 to 0.10 from may 2008-2009 it means it weakening , so whenever BASIS

hen our future contract give as LOST .for e.g if BASIS go from 0.20 to 0.30
ned below the chart

if price increase from 4.00 to 4.20 then 25000kg * 4.20

the difference between future price (3.80)may 2008 - spot price may 2009 (4.20)
so the saving is the difference in rate (0.40) * number of weight KG of copper
The net cost is future price * the quantity of copper required 25000

Hedge Duration

CALL OPTION using Black Schole model

Stock (s) £100.00
Strike(K) £100.00
Volatility 40.00%
Term(T) 5.00
yield 4.00%
d1 0.67
d2 -0.22

Rate Price
4.00% £41.190
3.99% £41.173
DIFFERENCE(DV01) £0.017

Option BOND
Face x DV01 Face x DV01
£1,000,000.00 £186,210
£0.017 0.09

Write Buy
Options Bonds
£1,000,000.00 £186,210.19
 -£0.017 £0.09
-£168.51 £168.51

al in option the difference value is £0.017 and in bond is £0.09

mber of futures contracts in a cross hedge

CHANGE IN
FUEL
Price(S) Spot Price

2.00
3.50
-5.00
1.00
2.60
-2.00
-1.00
-1.00
4.00
1.00
-3.50
-2.00

2.83
81.45%
0.68

Gallons of oil
£
NO. OF CONTRACT = HEDGE * NUMBER OF GALLON WILL PURCHASE / QUANITY PRICE
N=H*N/Q

future price gain= Spot price/(correlation ^2)

future price *no.of contract*per gallon price

CHAPTER 14
on price

method instead of Black Schole Model

 -0.58
Call
Solved(find the variable down one) formula
u(magnitude of up jump) 1.19 exp(vol *sqrt(Time per step))
d(magnitude of down jump) 0.84 exp(-vol *sqrt(Time per step))
a 1.083 exp((riskles - div yield)*Time per step)
p (probability of up jump) 58.38% p= exp(risk* time per step) - discount / u - d
1-p (probability of down jump) 41.62%
Discount Rate 0.9512 exp(-risk free rate * time per step)
Discount rate for put 0.90

0(Month) 0.25(3 months)

tion down]* exp(-r*t)

Price goes UP 35.80
Call Formula--> 7.07
30.00 0.00
3.92
1.07 Price go DOWN 25.14
0.00
Put Formula--> 4.21

, Call , Put option prices for any time period like i have done HALF yearly
dd 2 more step in it either upward(U) and downward(d)

RHO Greeks

ming option king

tivity of an option's price to changes in the option's parameters.

on (call and put) if 1% of interest rate increase of decrease

4.74
-4.86782749330025
Delta Greek

If Price Change how much i will loose or gain

New Stock Price 9.00
Hedge LONG# of Share £61
Value of Long Shares -£63 lose
Value of Short Options -£54 lose
 Hedge Value -£8.54 lost if stock price drop from £10 to £9

Formula
So = Stock Price
d1 = (ln(So /K)+(r + (vol ^2/2)))*T K = Strike Price
Vol *sqrt(T) d = discount
vol = volatility
d2 = d1 - Vol *sqrt(T) N = Normal Distribution
r= riskless rate
Call Price= So N(d1)-K*exp(-rT) *N(d2) T = Time /Term
Put Price=K*exp(-rT) *N(-d2) - So N(-d1)
ta(0.612) by this formula and the price of 61 shares is (shares * stock price )(61.2* £10) = £612

( share price (612) - option price (137)

VEGA GREEKS

re is change come in volatility INPUTS

Stock Price(S) 10
Strike Price(K) 10
Volatility 0.3
RiskFree Rate (r) 0.04
Term Year (T) 1
DIV Yield 0

Black-Scholes(european C 1.38
d1 0.28
vega 5.88
d2 -0.02
Theta Greeks

INPUTS
Stock Price(S)
*sqrt(t))+(r*S*exp(-rt)*normsdist(d1))-(r*k*exp(-rt)*normsdist(d2)) Strike Price(K)
*sqrt(t))-(r*S*exp(-rt)*normsdist(-d1))+(r*k*exp(-rt)*normsdist(-d2)) Volatility
RiskFree Rate (r)
Term Year (T)
DIV Yield

Black-Scholes(euro
d1
d2
Gamma Greeks
 Chapter 15 (Marketing Risk )
Distribution

Binomial Distribution tell us as follow

Probability (P) of successed in (n) trial
Mean(expected) value = np
Variance=p(1-p)n

The mean and expected value of trial we get it know from this mean as we get no. Of trial is 2 so the expected value of suc

mation of Binomial Distribution

an prime minister candidate. If a
fewer than 28 favor this
on for continuity
e Value Theory (EVT)

d too ( historical,montecarlo and parametric )

ll (also called Conditional VAR)

Var weighted / (bond price * significance)

average of 5% of last VAR value

VAR/ES
£0.00
£0.00
£0.00
£0.00
£0.00
£0.00
£0.00
£0.00
£0.00
£100.00
£100.00

second derivative of normal distribution is a expected short fall.

Chapter 16
 mple Step by Step
currency forward contract
TE MOVEMENTS AND THEN COMBINE THE RISK FACTOR

£10 million in exchange

10000000

16500000
93581
4.94%
5.97%
0.25
0.9878
0.9853
1.6637

me portfolio

Bond#2
100
1
4%

Map
s
Bond#2 Spot Rate Principal
£104 0.0400
0.0462

0.0519 200.00
0.0572
0.0611
200.00

ialized Debt Obligation

gage backed Securities and another known as Asset backed Securities

ey from the people in the form of mortgage payment

ey from the people in the form of Credit card , debit card form,loan , bonds and etc
hile because if any risk come it will be absorbed by rest of the securities
f the MBS and ABS cover the amount of default risk

mortgage payment come it come to the investor in the form of percentage of interest which is know as Pro Rata
he portion of mortgage investment and get there interest
r lose if interest rate come down because borrower get a chance to refinance its mortgage or pay the mortgage before the
or loose the amount of interest which he calculated for certain time of period .
ther divided into 3 section namely Low risk, medium risk and high risk those investor who take low risk they get there
ompare to medium risk holder and then paymnet goes to medium risk holder and then high risk holder obviously with high paymnet

he risk of principal and interest on mortgage , Investor those are interested in Principal they invest in principal and
n interest they invest in interest . So when interest rate increase those who invest in interest rate they get more money
s down those who invest on principal they get they principal more quickly

pula

c capital adequacy, market risk, credit risk and operational risk.

sing the correlation coefficient.
stributions in financial markets are mostly skewed. The copula, therefore,
value-at-risk to deal with the skewness.

hich examines the association or dependence

was invented in 1957, it was not applied to financial markets and finance until the late '90s.

Inverse (CDF)=normsinv(bond Marginal)

-1.64485362695147
-1.64485362695147

neous goes dafault (ITS IS FAILED)

Chapter 17
end on volatility

Formula

d1 = (ln(So /K)+(r + (vol ^2/2)))*T

Vol *sqrt(T)
20% was previous before using goal seeker
d2 = d1 - Vol *sqrt(T)
`
Call Price= So N(d1)-K*exp(-rT) *N(d2)
Put Price=K*exp(-rT) *N(-d2) - So N(-d1)

18.49 was price b4 using goal seeker

d the difference in
0% so after using the build in
rite just beside to Volatility

Chapter 18

e divided in to 3 parts

e vehicle(SPV) as use in Morgage backed security

hange assets

Tranches (Liabilities)
100 A
100 B
100 B
100 X

tization
 Collateral(Income ) and Tranches (Liabilities) should be equal in total

L = Libor

TEREST ON THE BASE OF L(LIBOR)

T ON THE BASES OF 12%-L(LIBOR)
CASH FLOW) WHICH COME FROM THE INVESTMENT

Duration £D
4.2 210.00
4.8 240.00

afe the Cash Flow and

19 (CREDIT RISK MANGEMENT)

d Loss Given Default are correlated

Variance = EDF *(1-EDF),Standard Deviation =sqrt(Variance)

This tell us 75% of LGD it means there is 25% of recovery

expected Loss without correlation

covariance =correlation *stdev(LGD)*stdev(EDF)

EDF * LGD + Covariance

the expected loss will be £ 75000 so as much i changed the correlation it will show me result
of Default

Spot Rates
Year 2
5%
6.40%

98.68% p(1+k)=1+i or p=1+i/1+k

1.32% 1-p

EN DEFAULT (LGD)

Senior
4%
3.30%
54.79% Alpha/Alpha + Beta

L 2 is not acceptable where as

of investment .

ue

bability is 100% mean 100/100 where 1/50 people ask for £10000 back
he Gain and Probability and then sum them all we will know how much we are gaining for lossing

-10000 -20000.00 -50000.00

0.02 0.01 0.004
-200 -200.00 -200.00

that is 10,000 £2,000,000.00

er 20 (Measuring Actual Default Risk)(Credit Risk)

(Debt) rating
govt they donot take money .

Default of risky bond

Spot Rates Implied Forward (f)

Year 2 year 1 and 2
5% 6.01% f=(1+i(2nd year))^2/(1+i(1st year))-1
7.00% 9.04%

98.13% 97.22% p(1+k)=1+i or p=1+i/1+k

1.87% 2.78% 1-p

CP= 1-(p1*p2*....pn)
CP=1-(p1*pi(implied forward)){if there are more years we multiple all the P's and get the answer)

ocess

Chapter 21
 after 3 years

nt of risk. Risk-adjusted return on capital (RAROC)

rent projects with varying risk levels.
to simple return on capital (ROC).

es +ROC-EL/EC

RAROC Numerator 9.88 Revenue-expenses +ROC-EL

RAROC Denominator (EC) 75.00 EC
RAROC 13.17%
 Implied Balance Sheet
Asstes Revenue =
Loan (loan portfolio) 1000.00 Expense =
Gov't Securities 75.00 ROC =
d-------------------------------------------------------------------------------d EL+
Liabilities (deposits) 1000.00 Economic Capital
Equity 75.00

RAROC formula = Revenue-expenses +ROC-EL/EC

Chapter 22
lity of Default)

Rating UGD
AAA 69%
AA 73%
A 71%
BBB 65%
BB 52%
B 48%
CCC 44%

dit Default Swap

onaut and the insurance company pay them 5 million
08 lehman brother collapse and AIG suppose to give 400 billion dollar
edit default .

nterest Swap
t Variable rate then u have to pay ( LIBOR + 1%) or fixed rate (10%)
t Variable rate then u have to pay ( LIBOR) or fixed rate (7%)

if offer company B , I pay your LIBOR but in reply u have to pay me 8.5% interest rate
est rate on 5 million .

ave to pay 8.5% to SWAP BANK and in reply it will get the LIBOR amount and plus company B
y B pay only 9.5%(8.5% +1 %) .

SWAP bank , as company A fixed rate was 7% but company A have a contract with its own bank of
hich is 1% extra coming to company A fixed rate so company A making money of 1%
bank from company A its go directly to Company B but from 8.5% which company B

ulate Interest Rate Swap

0.25 Years 5.00%

0.50 years 5.50%
0.75 Years 6.00%
1.00 years 6.50%
1.25 Years 7.00%
party pay 8%(Fixed Rate) interest rate

DISCount. FACTOR (exp(-time*rates)

0.988
0.956
0.916

Pay Variable Cash Flows (6 months as agreed)

FV(time*rate*notional amt+notional amt (PV)(FV *exp(-LIBOR rate* Time)
102.75 101.473619000746

Total 101.473619000746

Swap
interest rate.
r instead of taking from from french bank they take loan from USA bank
nch company which is based in USA want loan of 30 M euro they can take from
And obviously another way around the interest rate will forward to the relevant bank

re principle from the exchange rate risk

Chapter 23

porate Bond (Risky Bond) is known as Credit Spread options

pread - Strike Spread,0)

read - Credit Spread,0)
ave the profit

2%
£100
4
8%
5%
3%

pread - Strike Spread,0)

read - Credit Spread,0)
£4
£0

Chapter 24

ration of rating for example what is the possiblity of BBB to become AAA or what is the probability to remain BBB in particular time like
e time period like for how long probability of bond you want to check in any rating like BBB in other word what is the chances of BBB b
spot rate with the help of rating agency we can find out the 3 or 4 years forward spot rate and the difference it increase or decrease pe
e bond value and find out the future value of bond with respect to its coupon value
it is increasing or decreasing for e.g from BBB to A or BBB to BB

5 (Operational Risk )
process,system and external risk )

cator Aprroach and Standard Approach

Basic Indicator Approach (BIA)

Gross Operating Income (GOI)
Year - 2 Year -1 Beta
£30 £40.00 18.00%
£30 £40.00 18.00%
£30 £40.00 12.00%
£30 £40.00 15.00%
£30 £40.00 18.00%
£30 £40.00 15.00%
£30 £40.00 12.00%
£30 £40.00 12.00%
£240 £320.00
£240 £320.00
Average £240.00
Alpha(factor settle by BASEL) 15.00%
Capital £36.00

So it indicatice Capital Average of £36 against the Operational Risk

Unexpected Loss
R approach in which we check the maximum loss that will happen.
LGD = Loss given default .
Life Cycle
ness Line , Locational and Legal)
nal and external , by regression
e expecting loss ,and define threshold)

economic capital
aring what u expect and what u got
ntrol and causes

Chapter 26
tive VAR and Absolute VAR )

1000000 1000000
30% 30%
10% 10%
95% 95%
1.64 1.64

49.35% 49.35%
£493,456.09 £493,456.09

39.35% 39.35%
£393,456.09 £393,456.09

1% 1.00%
0.80% 0.08%
2.32% 2.32%

39.85% 39.85% This the % that we have to adjust against liqu

40.50% This the % that we have to adjust against liqu

_z)) +(1/2)*Spread
al_z)) +(1/2)* Worst Spread

apter 27 & 28

Total Capital >= 8%

redit Risk)+(Market Risk *12.5)+(Operational Risk *12.5)
or Review , 3rd Pillar Market Discipline)

proach (LDA)

d another known as loss severities

n particular interval of time

Severity Distribution
Probability Severity
0.6 1000.00 600.00
0.3 10000.00 3000.00
0.1 100000.00 10000.00
Expectation (X) 13600.00 13600.00

£9,520.00
£90,480.00 This is Loss which is considered for the risk

9 ( Investment Risk Management )

e or derease in any allocation

EURO
$100
12%

0
0.0144

{ X
0.0025 0.0000 200.00
0.0000 0.0144 100.00
 X'[X Beta
244.00 0.61
1.77
Beta is a mesure of a stock volatility in relati

244.00
15.62
25.69

CAD EURO
200.00 100.00
5% 12%
0.50 1.44

£16.45 £19.74

0.61 1.77

0.053 0.152
Covariance / volatility * critical z

ge funds

vestment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of g

ships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are

cause they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they

o reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge fun
of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile th
of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theore

variance/(obser-mean)2 Daily Log RTN/period return daily Variance

13062.01
889.18 0.09 0.004691
2372.59 -0.02 0.002077
6852.40 -0.04 0.003956
1965.96 0.04 0.000287
745.79 0.02 0.000051
1501.50 -0.01 0.001407
556.92 0.02 0.000086
557.47 0.05 0.000538
4925.34 0.05 0.000413
23734.73 0.08 0.002704
26160.09 0.01 0.000344
83323.99 0.03 0.001505
0.0388
6943.67 0.0017
83.33 0.04

I will not invest in this portfolio because it giving me 2.18% return whereas mkt rtn is more
used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expe

turn over the risk-free rate to the additional risk taken; however, systematic risk is used instead of total risk. The higher the Treynor ra
terize how well the return of an asset compensates the investor for the risk taken, the higher the Sharpe ratio number the better
nd's actual return and those that could have been made on a benchmark portfolio with the same risk
es a portfolio manager's ability to generate excess returns relative to a benchmark, but also attempts to identify the consistency of the
olio expected return - CAPM )

Chapter 2
 Chapter 2
riable in other words it prove randam variable so there can be many random variable and many distribution three types of distribution

e the square root it become standard deviation

ss of the dataset indicates whether deviations from the mean are going to be positive or negative.
then 3 is known as laplace distribution and it fall in fat tail. Higher value indicate higher probability of movement

3rd moment 4th moment

-94727.57 9303261.45
167797743.79 158260120032.32
236874235.40 218935749550.89
35272218.34 31399328766.62
32033334.63 29747435875.21
33828195.13 31990309286.02
8153825.78 7617548657.31
25670923.36 24371461218.62
59388290.68 59185776607.68
56757437.73 59207088743.81
57263512.16 64538268739.83
116884282.63 132630933190.91
829829272.05 74353092788.11

1.56 skew by build in formula

0.97 kurtosis by build in formula

elp of this formula u can find out s,d,r and g but drop back is that it consider the growth rate is constant
r goes below zero
market all of this is normal distribution

sigma means volatility

an there are 5 % chances of having the stock price at this price

mple is small or observation is small

og periodic return of asset b)

B observation log return variance

1117.96
1095.41 -0.02 0.002
1113.34 0.02 0.000
1148.69 0.03 0.000
1205.43 0.05 0.001
1232.92 0.02 0.000
1192.97 -0.03 0.003
1215.81 0.02 0.000
1271.10 0.04 0.001
1342.02 0.05 0.001
1369.89 0.02 0.000
1390.55 0.01 0.000
14696.09 0.02 0.000
and r = correlation

sales
Sales

110

100

90

80
f(x) = 2 x + 18
70 R² = 1

60

50

40

30

20
20 22 24 26
Temperature
28 30 32 34 36 38 40

ARY OUTPUT

Regression Statistics
0.757575757575758
0.573921028466483
0.520661157024793
 4.19234511649
10

df SS MS
1 189.393939393939 189.393939394
8 140.606060606061 17.5757575758
9 330

Coefficients Standard Error t Stat

97.6363636363636 11.8442602714315 8.24334837287
-1.51515151515152 0.461562006415995 -3.2826608215

he prediction of hypothesis value 972 can be rejected with confidence of 3%

hypothesis peridic value if rejection is near 90% then we refuse the peridict value
f Risk and to fnd the stock price and stock return
distribution

1200.00

1150.00

1100.00

1050.00 Colum
nC

1000.00

950.00

900.00
1 2 3 4 5 6 7 8 9 10 11 12

variance
0.000044 ALPHA 0.05
0.000003 GAMMA 0.05
0.000001 BETA 0.90
0.000000 Long Run Variance 0.000078
0.000003
0.000004 GARCH 0.00048
0.000004
 0.000000
0.000000
0.000015
0.000004

0.000078

variance ALPHA 0.20

0.000044 GAMMA 0.30
0.004783 BETA 0.50
0.008211 Long Run Variance 0.01
0.008747
0.009123 Garch(1,1) 0.0048

Feburary variance January

weight 0.11% weight
6.00% 0.0528%
5.64% 0.0023% 6.00%
5.30% 0.0075% 5.64%
4.98% 0.0089% 5.30%
4.68% 0.0015% 4.98%
4.40% 0.0007% 4.68%
4.14% 0.0011% 4.40%
3.89% 0.0092% 4.14%
3.66% 0.0076% 3.89%
3.44% 0.0206% 3.66%
3.23% 0.0001% 3.44%

w block G367 which is 0.11%

manufacturing process by tracking the moving average of the output,
 gama*Last Variance

alpha*daily log rtn^2+beta*last variance

y share is cheap or expensive and what quality is the share have

times This answer mean that it will take me 14 years to get my 420 back
from company because every year company give me 30 p back

ng 13 times so it mean
mpanies what they are offering
tesco and sainsbury and then

ike for example (Intel 100) this mean

vestment, usually IT company have a potential to give

here to invest , any project whose IRR is higher thats the project to invest

of the cash in the business (input getting money from customers and output pays the
 62.27

* 100

4.42%

AUTHORITY.

* 100

4.42%
m 10% to 8%
of the bond decrease and if interest decrease value of bond increase
10% but the currently the interest rate of mkt decrease which increase bond value
 Colum
nB

8% 10% 12%
on )
X SUM cf/(1+ yeild)^n multiply T^2+T
column 3 column 4
tiply both above value 18.71
Formula
So = Stock Price
d1 = (ln(So /K)+(r + (vol ^2/2)))*T K = Strike Price
Vol *sqrt(T) d = discount
vol = volatility
d2 = d1 - Vol *sqrt(T) N = Normal Distribution
r= riskless rate
Call Price= So N(d1)-K*exp(-rT) *N(d2) T = Time /Term
Put Price=K*exp(-rT) *N(-d2) - So N(-d1)
*sqrt(Time per step))
*sqrt(Time per step))
kles - div yield)*Time per step)
isk* time per step) - discount / u - d

k free rate * time per step)

0.5 (6 months)
Price go more Up 42.72
OPTION UP----> 12.72 MAX(Price of stock up (G968) - Strike Price ,0)
(stock price *U) 0.00

14.90
0.00
(Stock price *D) 0.00

21.07
0.00
Option Down---> 8.93 (Strike price - price of stock down(G976))

124.00
ock price drop from £10 to £9

)(61.2* £10) = £612

INPUTS
10
10
0.3
0.04
1
0

1.38
0.28
-0.02
trial is 2 so the expected value of success is 37.50%(B1062)
 Mapping(PV)

Duration Cash Flow

£105.77
£5.48
200.00 £0.00
£5.15
£4.80
£78.80
200.00 200.01
 w as Pro Rata

the mortgage before the

w risk they get there

older obviously with high paymnet

st in principal and
they get more money
nd year))^2/(1+i(1st year))-1

1+i or p=1+i/1+k

the answer)
e-expenses +ROC-EL
Loan Revenue (£90)
(operating cost + Interest Expense)(£75)
Return of EC (£4.88)
Expected Loss (£10)
75.00
y to remain BBB in particular time like one year or more
er word what is the chances of BBB bond to be BBB bond )
e difference it increase or decrease per year like 15% increase in next each up coming year .
 Standardized Approach
Gross Operating Income (GOI) * Beta Factor
Year 3 Year 2 Year 1
3.60 5.40 7.20
3.60 5.40 7.20
2.40 3.60 4.80
3.00 4.50 6.00
3.60 5.40 7.20
3.00 4.50 6.00
2.40 3.60 4.80
2.40 3.60 4.80
24.00 36.00 48.00
£24.00 £36.00 £48.00
Average Capital 36.00
% that we have to adjust against liquidity risk
% that we have to adjust against liquidity risk
0.00
0.30
0.40
0.70
 Formula
Beta for Canadian Dollar total portfolio *([X/X'[X)
Beta for Euro
a mesure of a stock volatility in relation to the market

ternational markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

ment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

n the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, al

mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds
ans that the security will be less volatile than the market.
example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

return ^2 observation log rtn/var votality

1117.96
0.0088 1095.41 -0.020377 42.53
0.0004 1113.34 0.016236
0.0014 1148.69 0.031258
0.0018 1205.43 0.048214
0.0003 1232.92 0.022549
0.0001 1192.97 -0.032939
0.0003 1215.81 0.018965
0.0024 1271.10 0.044472
0.0021 1342.02 0.054293
0.0060 1369.89 0.020555
0.0000 1390.55 0.014969
0.0021 14696.09 Tracking Error
0.0463

me 2.18% return whereas mkt rtn is more which is 8%

rn of an asset based on its beta and expected market returns..

ead of total risk. The higher the Treynor ratio, the better the performance of the portfolio under analysis.
r the Sharpe ratio number the better
same risk
attempts to identify the consistency of the investor. This ratio will identify if a manager has beaten the benchmark by a lot in a few mo
many distribution three types of distribution uniform,normal and poisson

bability of movement

e is constant
36 38 40
 F Significance F
10.7758620689655 0.011143

P-value Lower 95%Upper 95%Lower 90.0% Upper 90.0%

3.517338692418E-05 70.32345 124.9493 75.6113927427082 119.6613
0.011143446795376 -2.579515 -0.450788 -2.37344823642922 -0.656855
Colum
nC
FUTURE VOLATILITY
0.0067
0.0692
0.0906
0.0935
0.0955

variance
0.0633%

0.0025%
0.0080%
0.0095%
0.0016%
0.0007%
0.0011%
0.0097%
0.0081%
0.0219%
0.0002%
14 years to get my 420 back
mpany give me 30 p back
(Price of stock up (G968) - Strike Price ,0)

ke price - price of stock down(G976))

ver a specified market benchmark).

y in the fund for at least one year.

have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mut

arket by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge fun
 Active Return
0.11 SUMMARY OUTPUT
-0.04
-0.07 Regression Statistics
-0.01 Multiple R 0.0495328437
0.00 R Square 0.0024535026
0.02 Adjusted R Square -0.108384997
0.00 Standard Error 0.0282056084
0.00 Observations 11
-0.01
0.06 ANOVA
-0.01 df SS MS
0.03 Regression 1 1.76103031E-05 1.761E-05
0.045738443932861 Residual 9 0.007160007128 0.000796
Total 10 0.007177617431

Coefficients Standard Error t Stat

Intercept 0.0190093146 0.010157828821 1.871395
X Variable 1 0.0326164768 0.219224507887 0.148781

benchmark by a lot in a few months or a little every month. The higher the IR the more consistent a manager is and consistency is an id
can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and profess

ary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fa
 F Significance F
0.022136 0.885007

P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%

0.094089 -0.003969 0.041988 -0.003969 0.041988
0.885007 -0.463304 0.528537 -0.463304 0.528537

anager is and consistency is an ideal trait.

estments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

dge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than
its investment strategies.

ese funds can carry more risk than the overall market