Formula Sheet

Derivatives
REPLICATION
Long risk-free asset Long risk-free asset (lending) = Long asset + Short derivative
(lending)

Long derivative - Long derivative = Long asset + Short risk-free asset (borrowing)

Short asset - Short asset = Short derivative + Short risk-free asset (borrowing)

FORWARDS

FRA settlement
Notional principal x (Floating rate - Forward rate) ( )
Days
360
Days = Number of days in floating
rate term

( )
to the long = Days Floating = Floating rate
1 + Floating Forward = Forward rate
360
F0(T) = Price of the Forward
S0 = Spot price of the underlying asset
Forward rates F0(T) = S0 (1 + r)T
r = Risk-free interest rate
T = Time of the contract
VT(T) = Value of forward at time T
ST = Spot price of the underlying at
Value VT(T) = ST - F0(T)
time T
F0(T) = Price of the Forward
ϒ = Benefits
Net cost of Carry Net cost of Carry = ϒ – θ
θ = Costs
F0(T) = Price of the Forward
S0 = Spot price of the underlying asset
Forward Price with r = Risk-free interest rate
F0(T) = (S0 - ϒ + θ)(1 + r)T T = Time of the contract
Net cost of Carry ϒ = Benefits
θ = Costs
Vt(T) = Value at time t
Value at any point during
Vt(T) = St - F0(T)(1 + r)-(T - t) St = Spot price of the underlying asset
the contract (time t) at time t

SWAPS
Plain vanilla interest rate swap
FR = Fixed rate
Fixed-rate = (Swap FR – LIBOR) x Т x NP T = Number of days in the settlement
payment (t) 360 period
NP = Notional principal
 Derivatives
OPTIONS
CALL OPTIONS

In-the-money: ST > X
At-the-money: ST = X
Out-of-the-money: ST < X

Call option buyer Call option seller CT = Call option’s value at expiration (T)
ST = Stock price at expiration (T)
CT = Max (0, ST - X) CT = - Max (0, ST - X) X = Option’s exercise/strike price
П = Profit
П = CТ - P П = CТ + P P = Option’s premium paid

PUT OPTIONS

In-the-money: ST < X
At-the-money: ST = X
Out-of-the-money: ST > X

PT = Put option’s value at expiration (T)

Put option buyer Put option seller ST = Stock price at expiration (T)
PT = Max (0, X - ST) PT = - Max (0, X - ST) X = Option’s exercise/strike price
П = Profit
П = PТ - P П = - PТ + P P = Option’s premium paid

S0 = Spot price of the underlying asset

at time 0
p0 = Value of put option at time 0
X
Put-Call Parity S0 + p0 = c0 + c0 = Value of call option at time 0
(1 + r)T T = Option’s duration
X = Exercise price of the option
r = Risk-free interest rate

F0(T) = Forward price

p0 = Value of put option at time 0
Put-Call Forward F0(T) X c0 = Value of call option at time 0
+ p0 = c0 +
Parity (1 + r)T (1 + r)T T = Option’s duration
X = Exercise price of the option
r = Risk-free interest rate
 Derivatives
BINOMIAL MODEL
u = Up-factor
S+ S1+ = Upward value of the underlying
Up-factor u= 1 asset after first period
S0
S0 = Value of underlying at time 0

d = Down-factor
S- S1- = Downward value of the underlying
Down-factor d= 1 asset after first period
S0
S0 = Value of underlying at time 0

X = Exercise price of the option

Value of option on c1+ = Option’s value after upward
c+1 = Max (0, S1+ - X) = S1+ - X movement
upward movement S1+ = Upward value of the underlying
asset after first period

X = Exercise price of the option

c1- = Option’s value after downward
Value of option on
c1- = Max (0, S1- - X) = 0 movement
downward movement S1- = Downward value of the underlying
asset after first period

π = Synthetic probability of
upward move
Synthetic 1+r-d
π= r = Risk-free rate
Probabilities u-d u = Up-factor
d = Down-factor

c0 = Value of call option

1 - π = Synthetic probability of
downward move
πc1+ + (1 - π)c1- c1+= Option’s value after upward
Call option’s value c0 = movement
1+r
c1- = Option’s value after downward
movement
r = Risk-free rate

p0 = Value of put option

1 - π = Synthetic probability of
downward move
πp+1 + (1 - π)p-1 p1+ = Option’s value after upward
Put option’s value p0 = movement
1+r
p1- = Option’s value after downward
movement
r = Risk-free rate