Probability Primer

Semua materi dalam slide ini diambil dari Buku Principle of econometrics R.Carter Hill (WILEY)

1
PDF & CDF

2
Random Variables

Variable whose value is unknown

until it is observed

In other words it is a variable that is

not perfectly predictable
3
Random Variables

Discrete Continuous

4
Random Variables = experiments
• Consider X, the numerical value on the slip.
• If the slips are equally likely to be chosen after shuffling, then in a large
number of experiments (i.e., shuffling and drawing one of the ten slips),
• 10% of the timewewould observe X = 1
• 20% of the time X=2
• 30% of the time, X=3
• 40% of the time X=4.
• These are probabilities that the specific values will occur.
• We would say, for example, P(X=3)=0.3

5
Probability Density Function (PDF)

f (x)

the probabilities of possible

outcomes
6
PDF

7
Cumulative Distribution Function (CDF )

F (x) = P(X ≤ x)

Probability that X is less than or

equal to a specific value x.
8
Beberapa Notasi
Continuous random variables can
take any value in an interval and have
an uncountable number of values.
Consequently the probability of any
specific value is zero.

9
Beberapa Notasi
How are these areas obtained?
The integral from calculus gives
the area under a curve

10
 X= {1,2,3,4}
Y={1=Shaded, 0=Non Shaded} 11
MARGINAL DISTRIBUTIONS
• the probability distributions of individual random variables

12
Conditional Probability
• What is the probability that a randomly chosen slip will take the value
2 given that it is shaded? This question is about the conditional
probability

13
Statistical Independence
• Two random variables are statistically independent if the conditional
probability that X=x given that Y=y, is the same as the unconditional
probability that X=x.

14
Summation Notation

15
16
Summation Rules

17
Summation Rules

18
Summation Rules

19
Expected Value
of a Random Variable

20
21
For the population in Table P.1,
the expected value of X is

22
Key Point

The expected value of the random

variable is the average value that
occurs in many repeated trials of an
experiment.
23
Conditional Expectation

24
what is the expected numerical value of X
given that Y=1, the slip is shaded?

25
RULES FOR EXPECTED VALUES

the expected value of a sum is

the sum of the expected values.

26
Variance & SD

27
Variance (σ2) of a Random Variable

property of variances

28
Distributions with different variances.

29
Covariance

30
Correlation

31
Remember !

If X and Y are independent random

variables then their covariance and
correlation are zero.
However, just because the covariance or correlation between two random variables is
zero does not mean that they are necessarily independent. There may be more
complicated nonlinear associations

32
Normal Distribution

33
34
Standard normal random variable
is r.v. that has a normal probability density
function with mean 0 and variance 1

35
 Contoh Perhitungan
Data Mean 25.00 x-u (x-u)^2
Ke-1 10 SD 11.18 -15 225
Ke-2 20 Var 125.00 -5 25
Ke-3 30 5 25
Ke-4 40 15 225
Sum 500
SD 11.18

36
Terima Kasih

37
Introduction: A Simple
Market Model

38
Rate of return (Stock)

39
Rate of return (Bond)

40
Assumption
Randomness • a random variable with at least two different values

Positivity of Prices • All stock and bond prices are strictly positive

Divisibility, Liquidity and • An investor may hold any number x and y of stock shares and
Short Selling bonds, whether integer or fractional, negative, positive or zero

Solvency • The wealth of an investor must be non-negative at all times

Discrete Unit Prices • Random variable taking only finitely many values

41
Definition

Divisibility
• The fact that one can hold a fraction of a share or
bond

Liquidity
• No bounds are imposed on x or y is related to
another market attribute (Market Clearing)
42
Definition

Long Short
Position Position

Beli Jual
43
The total wealth of an investor (portfolio)

44
Total Return for Investor

45
Example 1.1

46
Example 1.2

47
No-Arbitrage Principle

the market does not allow for risk-free

profits with no initial investment

48
Example 1.3
• Suppose
• Ex Rate GBP at A -> 1,58 USD
• While at B -> 1,6 USD
• i at US 4%, 6% at UK
• Strategy
• Borrow 10.000 USD at B -> 6.250
GBP -> Save for 1 year at UK -> 375
int rate (Total 6.625 GBP) ->
Convert to USD -> 10.467,5 -> Pay
Interest 400 USD -> Profit 67,5
USD

49
Direct Quote!

50
51
The IS* curve: Goods market eq’m
Y  C (Y  T )  I (r *)  G  NX (e )

e
The IS* curve is drawn for
a given value of r*.
Intuition for the slope:
 
↓ 𝑒 ⇒ ↑ 𝑁𝑋 ⇒ ↑𝑌 IS*
 
↓𝒊 ⇒ ↑ 𝑰 ⇒ ↑𝒀 Y
53
Binomia •Takes only two
l Model values

54
Example 1.4

55
Example 1.4

56
Risk and Return

57
The risk of this investment

58
What if -> x =0, then y = 100?

the whole amount is invested risk-free.

he return is known with certainty to be KA=0.1,

that is, 10% and the risk as measured by the
standard deviation is zero, σ A=0
59
60
Forward Contracts

•is an agreement to buy or sell a risky

asset at a specified future time, known
as the delivery date, for a price F, fixed
at the present moment, called the
forward price

61
Example

• Suppose that the forward price is $80.

• If the market price of the asset turns out to
be $84 on the delivery date, then the holder
of a long forward contract will buy the asset
for $80 and can sell it immediately for $84,
cashing the difference of $4.
62
 it will be described by a triple (x, y, z).
Here x and y are the numbers of stock shares
and bonds, as before, and z is the number of
forward contracts

63
64
Call Options

Payoff 65
Remark Managing Risk with Options
Suppose that your initial wealth is $1, 000

If stock goes up, the investment in options

will produce a much higher return than
shares, namely about 46.67%

Meanwhile, when investing in shares, you

would gain just 20% or lose 20%

66
 02
Risk-Free Assets

67
Time Value of Money

$100 to be received after one year

is worth less
than the same amount today

68
Type of Interest

Simple Interest Compound Interest

• Deret Aritmetik • Deret Geometri

69
Simple Interest

70
Perpetuity

a sequence of payments of
a fixed amount to be made
at equal time intervals and
continuing indefinitely into
the future.

71
Periodic Compounding

72
Continuous Compounding

73
Return on Continuous Compounding

≈
 

Log-linearization

Taylor Appoximation

74
How to Compare Compounding Methods

75
Zero-Coupon Bonds
• Involves just a single payment
• The issuing institution (for example, a government, a bank or a
company) promises to exchange the bond for a certain amount of
money F, called the face value,on a given day T, called the maturity
date
• The life span of a zero-coupon bond is up to one year,

76
Coupon Bonds

• Sudah kita pelajari ya dulu 

77
 03
Risky Asset

78
Focus

Concerned with common stock

Treat the prices of assets as random

79
Dynamics of Stock Prices
• The price of stock at time t will
be denoted by S(t). It is assumed
to be strictly positive for all t.
• We take t = 0 to be the present
time, S(0) being the current
stock price, known to all
investors.
• The future prices S(t) for t > 0
remainunknown, in general.

80
Dynamics of Stock Prices
• The probability space Ω consists
of all feasible price movement
‘scenarios’ ω ∈ Ω.
• We shall write S(t, ω) to denote
the price at time t if the market
follows scenario ω ∈ Ω

81
Example 3.1

These price movements can be represented as a tree,

82
Exercise 3.2
• Suppose that the stock price on any given day can
either be 5% higher or4% lower than on the previous
day. Sketch a tree representing possible stock price
movements !
• Gunakan data GGRM

83
84
Return
• The rate of return, or briefly the
return K(n, m) over a time
interval [n, m] (in fact [mτ, nτ]),
is defined to be the random
variable
• The return over a single time
step [n − 1, n] will be denoted by
K(n),

85
Example 3.3
• In the situation considered in Exercise 3.2 (Slide Ke-7) the returns are
random variables taking the following values:

86
Remark 3.1
• If the stock pays a dividend of
div(n) at time n, then the
definition of return has to be
modified.

87
 Cek … apakah benar rumusnya?
1. Buka data historis pergerakan harga saham PT
Gudang Garam (GGRM.JK)
2. Download data 5 tahun terakhir untuk daily prices +
dividen
3. Bandingkan nilai antara closing price dan adj close!

88
Non-additivity (Deterministics) of returns

t is common practice to compute the average of recorded past returns as a

prediction for the future. This may result in misrepresenting the information,
89
Simulasi Forecast dengan MA5, MA20, MA100

90
Simulasi SE dengan MA5, MA20, MA100

91
Membandingkan dengan Indices

92
Logarithmic
return

93
Membandingkan antar Perhitungan Return

94
Proof

95
Expected Return
• Suppose that the probability distribution of the return K over
a certain time period is known. Then we can compute the
mathematical expectation E(K), called the expected return
• We estimate the probabilities of recession, stagnation and
boom to be 1/4,1/2, 1/4, respectively. If the predicted annual
returns on some stock in these scenarios are −6%, 4%, 30%,
respectively, then the expected annual return is

96
Silahkan Cek Worksheet Scenario
SD_S0 SD_S_Boom SD_S_Recession
5049.066181 5301.519491 4847.103534
5.00% -4.00%

AVG_S0 AVG_S_Boom AVG_S_Recession

49,637.04 52,118.89 47,651.56
5.00% -4.00%

Ketika f(x) dikalikan suatu konstanta,

maka distribution nya tidak berubah! 97
Konsep Probabilitas

98
Proof

Expectation of a sum of random

variables is the sum of expectations

Functions of random variables are

also random
99
Binomial Tree Model

100
Binomial Tree Model

101
Two-step binomial tree of stock prices

102
Three-step binomial tree of stock prices

103
 Risk-Neutral Probability
the expected one-step return

The expected stock prices for n = 0, 1, 2,

104
Comparing Risk Free Securities in Stock and
Bond
• If the amount S(0) were to be invested risk-free at
time 0, it would grow to S(0)(1 + r)n after n steps.
Clearly, to compare E(S(n)) and S(0)(1 + r)n we only
need to compare E(K(1)) and r.
• An investment in stock always involves an element of
risk, simply because the price S(n) is unknown in
advance. A typical risk-averse investor will require that
E(K(1)) > r,
105
Risk-Neutral Probability

p∗ E∗
•probability •expectation

106
Risk-Neutral Probability

107
108
Martingale Property

109
Example 3.6
• Consider a two-step binomial
tree model such that S(0) = 100
dollars, u = 0.2, d = −0.1 and r =
0.1. Then p∗ = 2/3 is the risk-
neutral probability, and the
expected stock price after two
steps is

Konsep yang sama dapat diterapkan untuk Trinomial Tree Model

110
Trinomial Tree Model

111
Trinomial Tree Model

112
Risk-neutral probabilities p∗, q∗

113
Remark

Konsep binomial tree model dapat

diterapkan untuk
Continuous-
Trinomial Tree
Time Limit
Model
Model
114
Density of the distribution In Continous Model

115
“Detail untuk Continous Time Model
tidak dibahas lebih jauh”

116
Terima Kasih

117
 04
Discrete Time Market Models

118
The wealth of an investor

119
Assumption

Randomness

Positivity of Prices

Divisibility, Liquidity and Short Selling

Solvency

Discrete Unit Prices

120
Investment Strategies

Investing the proceeds

Selling some assets
in other assets

121
 Example 4.1

initial wealth V (0) = 3, 000 dollars

x1(1) = 20 shares of stock number one,
x2(1) = 65 shares of stock number two,
y(1) = 5 bonds

2, 825 3,730
122
Definition 4.1

123
Definition 4.2

Definition 4.3

124
Definition 4.4

Assumption 4.6 (No-Arbitrage Principle)

125
Proposition 4.2
The binomial tree model admits no arbitrage if and only if d < r < u.

126
Theorem 4.4 (Fundamental Theorem of Asset Pricing)

127
Example 4.5

128
Example 4.5

129
Hitung dengan
Kalkulator

130
For each scenario (each path through the tree) the corresponding risk-
neutral probability can be computed as follows

131
Extended Models

Primary •Stock, etc

Securities
Derivative •Option, FOrward
Securities
A derivative security cannot exist in its own right,
unless the underlying security or securities are traded

132
Contoh Penerapan Arbitrage

133
Transaksi Valas (1) Sahabat Valas

VIP

134
Transaksi Valas (2) Sahabat Valas

VIP

135
136
137
Lending Rate > Deposit Rate

138
Investasi di Stock/Gov Bond
(COVID) r (nominal) 3,7%
Inflasi 1,47%
r (real) 2,23%

GGRM – 1Y
Seharusnya
d<r<u

Faktanya
d<u<r

Price Frek Prob

<43200 23 9.39%
>43200 222 90.61%
245

Daily Return Frek Prob d

< 0 % (d) -1,84% 128 52.24%
n
> 0 % (u) +2,09% 116 47.35%
245 u 139
Kontan Selasa, 06 Oktober 2020 / 07:00 WIB
• KONTAN.CO.ID - JAKARTA. Kinerja obligasi pemerintah pergerakannya cukup stabil sepanjang tahun
ini. Indobex Government Bond pada akhir tahun 2019 masih berada di level 269,22. Sementara pada
akhir kuartal III-2020 sudah berada di level 290,29. Artinya masih membukukan return sebesar 7,83%
• Head of Fixed Income Trimegah Asset Management Darma Yudha menilai pergerakan harga obligasi
pemerintah sejak awal tahun hingga akhir kuartal III-2020 masih cukup positif. Namun, Yudha
menyebut ada perbedaan pola pergerakan harga obligasi pemerintah pada tahun ini dibanding tahun-
tahun sebelumnya.
• Ia menyebut, jika sebelumnya rally pasar obligasi pemerintah terjadi akibat support dari investor
asing, pada tahun ini justru investor domestik yang menyokong pasar obligasi Indonesia. Seperti
diketahui, terjadi capital outflow besar-besaran pada pasar obligasi seiring terjadinya pandemi virus
corona pada awal Maret silam.
• “Jadi investor domestik justru berhasil membuat obligasi pemerintah bisa rally tahun ini. Hal ini tidak
terlepas dari melimpahnya likuiditas perbankan yang dialihkan dari pemberian kredit ke obligasi
pemerintah. Selain itu, pertumbuhan investor retail yang semakin membaik dan posisi Bank Indonesia
(BI) yang menjadi standby buyer turut menjadi faktor pendorongnya,” jelas Yudha kepada
Kontan.co.id, Senin (5/10).

140
 05
Portofolio Management

141
How to measure Risk?

142
Change in the Function

143
Return’s Notation

Logaritmic
% of Change
Return
• K (Besar) • k (Kecil)

144
Weight of Portofolio

145
Return of Portofolio

146
Expected Return on a Portfolio

147
The RISK (variance) of the return on a portfolio

Rumus ini untuk

Portofolio yang dibentuk
dari 2 buah aset
148
Diskusi

•Bagimana menghitung Risiko dari

portofolio yang terbentuk dari 3
buah asset, Var (X,Y,Z) ?

149
Correlation Between Two Variables/Assets

150
Covariance Between Two Variables/Assets

151
Typical portfolio lines with ρ12 = −1 and 1

152
How to find a portfolio with minimum risk

153
Proof

154
155
Catatan
• Notasi dalam bentuk Matriks tidak akan dibahas.
• Untuk memahami materi manajemen portofolio,
akan dilakukan simulasi dalam file excel.

156
Capital Asset Pricing Model

157
Capital Asset Pricing Model

158
Terima Kasih

159
 06
Forward and Futures Contracts

160
Forward Contracts

Agreement to buy or sell an asset on a fixed

date in the future, called the delivery time,
for a price specified in advance, called the
forward price.

161
Forward Contracts

162
Forward Contracts

A forward contract is a direct agreement

between two parties
No payment is made by either party at time 0
when the forward contract is exchanged

163
Settlement

Physical delivery of the asset on the

agreed date.

In cash.
164
Position

Short Long
•Sell the •Buy the
asset asset
165
Notation

Time when the forward contract is exchanged by 0,

Delivery time by T

Forward price by F(0,T)

The time t market price of the underlying asset by S(t)

166
Capital Gain
• At delivery the party with a long forward position will
benefit if F(0,T) <S(T). They can buy the asset for F(0,T)
and sell it for the market price S(T), making an instant
profit of S(T) − F(0,T).
• Meanwhile, the party holding a short forward position
will suffer a loss of S(T) − F(0,T) because they will have
to sell below the market price. If F(0,T) >S(T),

167
Payoff

168
Ilustration

169
Forward Price (in continous compounding)

No Dividends Including Dividends

170
Forward Price (in periodic compounding)

No Dividends Including Dividends

?
171
Forward Price (in zero-coupon bond prices)

No Dividends Including Dividends

?
172
Forward Price for stock paying dividends
(in continous compounding)

173
the basis in Foward Contract
The difference between the spot and futures prices

174
Dividend Yield

Dividends are often paid

continuously at a specified rate,
rather than at discrete time instants

175
Value of a Forward Contract

Every forward contract has value zero when initiated.

As time goes by, the price of the underlying asset may

change.

Along with it, the value of the forward contract will vary
and will no longer be zero, in general.
176
Value of a “Long” Forward Contract

Positive

Zero

Negative
177
Value of a “Long” Forward Contract

178
Value of a “Long” Forward Contract
(paying no dividends)

179
Futures

180
Diffrences of

181
Notation
• a futures contract involves an underlying asset and a
specified time of delivery,
• a stock with prices S(n)forn =0, 1,... And time T, say.
• In addition to the usual stock prices, the market dictates the
so called futures prices f(n, T) for each step n =0, 1,... such
that nτ ≤ T.
• These prices are unknown at time 0, except for f(0,T)
• we shall treat them as random variables.
182
Futures Characteristics
• it costs nothing to initiate a futures position.
• The difference lies in the cash flow during the lifetime
of the contract.
• A long forward contract involves just a single payment
S(T) − F(0,T)at delivery.
• A futures contract involves a random cash flow, known
as marking to market

183
Terms

• Each investor entering into a

Initial margin futures contract has to pay a
deposit

Maintenance • if the deposit drops below a certain

margin, level

184
Marking to Market (m2m)

•Random cash flow

185
Example 6.1
Suppose that the
initial margin is set
at 10% and the
maintenance
margin at 5% of
the futures price.

186
Theorem 6.5
• If the interest rate is constant, then

this is caused entirely by the randomness of

the prices of the underlying asset

187
 Hedging with Futures
(Simplified with No initial margin)

• Let S(0) = 100 dollars and let

the risk-free rate be constant at
r = 8%.
• Assume that marking to market
takes place once a month, the
time step being τ =1/12.
• Suppose that we wish to sell
the stock after 3 months.
• The payments resulting from
marking to market are invested
(or borrowed), attracting
interest at the risk-free rate.
188
Complexity with initial margin asumption
• the exercise dates for futures are typically certain fixed
days in four specified months in a year, for example the
third Friday in March, June, September and December.
• If we want to close out our investment at the end of
April,
• we will need to hedge with futures contracts with
delivery date beyond the end of April, for example, in
June.
189
 Hedging with Futures
(with initial margin)

• Let S(0) = 100 dollars and let

the risk-free rate be constant at
r = 8%.
• Assume that marking to market
takes place once a month, the
time step being τ =1/12.
• Suppose that we wish to sell
the stock after 2 months.
• The payments resulting from
marking to market are invested
(or borrowed), attracting
interest at the risk-free rate.
190
the basis in Futures
• The difference between the spot and futures prices

191
Optimal Hedge Ratio (N)

Tips -> Cari turunan pertama wrt N, set equal to zero

192
Futures on Stock Index

193
Stock Index

A stock exchange index is

a weighted average of a selection of stock
prices with weights proportional to the
market capitalization of stocks.

194
Approximation
• Stock Index will be approximately proportional to the
value of the market portfolio
• For example, the Standard and Poor Index S&P500 is
computed using 500 stocks, representing about 80%
of trade at the New York Stock Exchange

195
Hedging Based on CAPM

196
Proposition 6.6

197
Terima Kasih

198