1 ST and x ∼ θ(μ- σ 2 σ 2

CHAPTER 1: INTRO LONG FWDS: (negative sign in front if short)

PAYOFF SHORT FWD ON ONE UNIT:St −K (worth S , buy at K) t
f =s0 −k e
−rt
NO INCOME: x= ln , ¿
PAYOFF LONG FWD ON ONE UNIT: K−S (sell at K, worth S ) −rt T S0 2 T
t KNOWN INCOME: f =s −I −k e
t

0 Volatility per annum = volatility per trading day X √252

CHAPTER 2: FUTURES MARKETS
CHANGE IN MARGIN ACC: YIELD OF q: f =s e
−qt
−k e
−rt ¿ trading days till maturity
0 LIFE OF AN OPTION: T =
position¿ × ∆∈price=∆∈margin account 252
Entitled to withdraw any balance in excess of initial margin ∆
GAIN/LOSS ON FUTURES: (Size of pos.)( FWD Price) =

¿
N × tick ×(S ¿ ¿ 1−F 0 )¿
CHAPTER 3: HEDGING WITH FUTURES
r(T −t)
BASIS: FORWARD CONTRACT:
f =s−k e
Spot price of asset−Futures price of contract CHAPTER 6: INTEREST RATE FUTURES
−rT
LONG HEDGE (PURCHASE OF ASSET):
DAY COUNT (DC): Int. earned btwn two dates = PRICE OF A CALL: c=S N d −k e
0 ( 1) N (d 2)
Cost of asset = S
¿ Days btwn dates −rT
2 × Couponinterest ∈ref
PRICE OF A. PUT: p=k e N (−d 2) −S0 N ( d 1 )
period
Gain on futures = F −F
¿ Days∈ref period
2 1 ,
Net amount paid = where DC for treasury bonds is (actual days elapsed/actual days btwn coup
pmts), (30/360) for corp. & municipal bonds, and (actual/360) for money
S2−( F ¿ ¿ 2−F1 )=F 1+ b2 ¿ , where market instruments
CASH PRICE OF US TREASURY BOND = Quoted Price + (Accrued interest since
b 2=S 2−F 2 last coup date [use DC]) X Coupon
CASH PRICE OF A BOND = (Most recent settlement price X Conversion
SHORT HEDGE (SALE OF ASSET) factor) + Accrued interest
Price of asset = S2 CHEAPEST TO DELIVER BOND: Where quoted bond price – (Most recent
settlement price X Conversion factor) is least.
Gain on futures = F 1−F2 EURODOLLAR (€$) FUTURES:
Futures Quote: Q = 100 – futures int. rate
Net amount received = Contract Price: ?
Interest earned: Principle X T X €$ rate, where €$rate = 100 – Q
S2 +(F ¿ ¿ 1−F 2)=F 1 +b2 ¿ DURATION BASED HEDGING STRATEGIES USING FUTURES:
# OF CONTRACTS TO HEDGE UNCERTAIN
CROSS HEDGING

σS ¿ P . DP
OPTIMAL HEDGE RATIO:
¿
h =ρ . ∆ y =N = , where
σF V P DF
¿ h¿ . Q A , where A is size of ∆ P=−P . D p . ∆ y and
OPTIMAL # of CONTRACTS: N =
Q ∆ V F =−V F . D F . ∆ y .
QF
V F= Contract price for one interest rate futures contract, D F= Duration of
( )( )
F
pos. hedged (units) and
Q is size of 1 futures contract (units). S0 σ
2
¿
h .V A
asset underlying the futures contract at maturity, P = Fwd value of
+ r+ln T
TAILING HEDGE: N =
¿
, where V is $ value of pos.
portfolio being hedged at maturity, D P= Duration of portfolio of K 2
VF A maturity of hedge  If comp loses money when int. rate drops, hedge by d 1=
long futures and vice-versa. σ √T
hedged and V is $ value on 1 futures contract (futures price x Q )
CHAPTER 7: SWAPS
F F VALUATION OF INT. RATE SWAPS: d 2=d 1−σ √ T
¿ V A
Long fixed: Vswap=Bfix−Bfl N ( ABCD)=N (0 , AB)+CD ( N ( AB +0.01)
# OF STOCK INDEX FUTURES CONTRACTS TO SHORT: N =β . ,
Vswap=Bfl−Bfix
Long floating:
VF US OPTIONS:

B¿= ∑ K e +Q e where Q = par. D ≤ K [ 1−e ] → Never execute early

−r (T i+1−t i )
where V is pos. size x S and V is delivery price x futures price
r i ti r nt n

A 0 F
Bfloating=∑ K e +Q e where D ≥ K [ 1−e ( ] → execute early
−r T −t i )
TERMINAL VALUE HEDGE FUND: Initial ׿ ]
¿ −r 1 t 1 −r1 t 1 i+1

TERMINAL VALUE CASH FUND: Initial ׿ ] K ¿ =t × LIBORt × par CHAPTER 11: TRADING STRATEGIES W/OPTIONS

CHAPTER 4: INT. RATES VALUATION OF CURRENCY SWAPS: If $ received and foreign paid then Payoff from a BOX SPREAD

R mn
V swap =B D −S 0 B F . If foreign received and $ paid then Stock price Bull call spread payoff Bear put spread payoff Total payoff

) A(1+
ST  K1 0 K2 - K1 K2 - K1
TERMINAL VALUE OF INVESTMENT (NON CONT.): K1 < ST < K2 ST - K 1 K2 – ST K2 - K1

m V swap =S 0 B F - BD ST  K2 K2 - K1 0 K2 - K1

Rn
TERMINAL VALUE OF INVESTMENT (CONT. COMPOUNDING):
Ae CHAPTER 9: PAYOFFS

Rm
LONG CALL:max ⁡(S t −K , 0) SHORT CALL:
CONTINUOUS RATE: R =m. ln (1+ )
c min ⁡( K−S¿¿ , 0) ¿
m LONG PUT: max ⁡( K−S¿ ¿t , 0)¿ SHORT PUT:
Rc
NON-CONT. RATE:
Rm =m.(e −1) m
min ⁡(S t −K ,0)
B=∑ C i . e
CHAPTER 11: TRADING STRATEGIES INVOLVING OPTIONS (excl. graphs)
− y. t i

c + K e−rT = p+ S 0
BOND PRICE:
PUT-CALL PARITY:
DURATION: D =

∑
CREATING PUTS AND CALLS WITH STOCK:
Ci . e− y .t t i C i e− y . t i i SHORT PUT (AKA COVERED CALL) = long stock and long call

∑ t i ×[ B ]= B
, where y
LONG PUT = Long call and short stock
LONG CALL (AKA PROTECTIVE PUT) = long stock and long put
SHORT CALL = short stock and short put
is zero-rate, C is cash flow CHAPTER 12: BINOMIAL TREES matching volatility 
CHANGE IN B PRICE/YIELD: ∆ B=−B . D .∆Yield e −d
rT

D p=
u−d
Use D* if y is not continuous, where D* = y −rT
f =e [ p . f u + ( 1− p ) f d ]
1+
m f A=e
−r ∆ T 2 2
[ p . f uu +2 p ( 1− p ) f ud +(1− p) f dd ]
C=
∑ i i , therefore
t 2
C e − y .t i
NO ARBITRAGE:

f u−f d
CONVEXITY:

B RISKLESS: ∆= , plug ∆ in to find value of

∆B 1 2 S o u−S o d
=−D ∆ y + C( ∆ y) portfolio then discount at r.
B 2 RISK-NEUTRAL:

PAR YIELD: C=
( 100−100 d ) .m E( S¿ ¿T )=S0 e rT =( Su × P ) +[S d × ( 1−P ) ]¿
A AMERICAN: Greater of either 1)
−r ∆ T
Where m = number of coupon payments per year e [ p . f u + ( 1− p ) f d ] or 2) payoff from
Zero Rate m × mT
d=e T
(PV of $1 received at maturity)
early exercise.
CHAPTER 13: WEINER PROCESS
 −Zero Rate1 × m1 −Zero Rate 2 × m2 2
A=e +e +¿ … ∅ ( Initial+ drift . x ∆ t , b . x ∆ t )
(value of annuity that pays $1 on each coupon payment)

R2 T 2 −R 1 T 1 dx=a . dt+b . dz ¿ )
FORWARD RATE: R F= ∆ x=a ∆ t+ b ∈√ ∆ t (with mean = aT, variance =
T 2−T 1 2
FOR AN UPWARD SLOPING YIELD CURVE: b T , std dev=b √ ∆ t )
R F > Zero Rate > Par Yield ∆ z=∈ √ ∆ t where ∈∼ ∅( 0,1) and
FOR A DOWNWARD SLOPING YIELD CURVE:

R F < Zero Rate < Par Yield (∆ z mean=1 , ∆ z variance=∆ t)

Z(t) – Z(0) = ∑∈ √ ∆ t
i
FORWARD RATE AGREEMENTS (FRA):

Cash flow to lender at T2 = L( Rk −Rm )(T 2−T 1 ) 2

−σ )T, σ T) and ∆ s ∼ θ ¿ μ ,
LnS ∼ θ(lnS + (μ
T 0
2
∆t
s
Cash flow to borrower at T2 =

L( Rm −Rk )(T 2−T 1 ) 2

If CF at T divide above by = 1+ R (T −T )
σ 2∆ t )
1,
m 2 1
VALUATION OF FRA: (Initially = 0)
GEOMETRIC BROWNIAN MOTION: ∆s = μ
.s .∆t +μ
When Rk is received (lender): VFRA =
− R2 T 2 . s .∈ √ ∆ t
L( Rk −RF )(T 2−T 1)e CHAPTER 14: BLACK-SCHOLES MODEL
When Rk is paid (borrowing): VFRA = E(ST) = S0eμT and var(ST) = S02e2μT (eσ^2T-1)
95% CI: (μ +- 1.96σ)
−R 2T 2
L( R F−R K )(T 2−T 1) e , where R2is the
continuously compounded riskless zero-rate for maturity at T 2
CHAPTER 5: FORWARD AND FUTURE PRICES
rT
FWD PRICE: F 0=S0 e =¿ ¿ =
rT (r −r f )T
(S¿¿ 0+U ) e =S0 e ¿= S0 e(r +u)T =
(r +u− y)T (c− y)T (r−k)T
S0 e =S 0 e =E (S T )e ,
where I = income, q = div yield, U = PV of storage costs, y = convenience yield, k =
required return, c = storage costs + int. paid to finance asset – income on asset.

Consumption commodity F0 ≤
(S¿¿ 0+U )e rT ¿ or ≤
S0 e(r +u)T
FWD CONTRACT VALUE:

f =(F ¿¿ 0−k )erT ¿, SHORT:

LONG:

f =(k−F 0 )e , assume F 0 = asset price at maturity

rT