Key Formulas Flashcards
Forward FX Rate?
Forward rate = Spot rate x ((1 + (n x r1)) / (( 1 + (n x r2)
Where = Spot rate x ((1+(days/360) x interest rate from international currency)) / ((1+(days/360) x interest rate from base currency))
Remember 360 days for forward FX
Gordon Growth Model (Div discount model)
GGM = value of next year div / (cost of equity cap - constant growth rate)
Earning per share (EPS)
EPS = Net income - dividends on pref shares / no. of ordinary shares in issue
Earnings yield
= EPS / market price per share
Price/Earnings Ratio
= Current market price / EPS
Net Asset Value (NAV)
= Assets - Liabilities
Cash price of commodity is X. Interest rate Y. Storage costs are Z.
The fair value of a future with X days to deliver is?
= Cash price + cost of carry
Note cost of carry may be finance or storage, so calc’d as
» cash price x % x (days/365)
The S&P 500 index is X. 1 year interest at Y. Dividend yield is Z.
The Fair value of the equity index future with X days to deliver is:
= Cash price + cost of carry (interest) - benefit (dividend)
(Interest - dividend) x (n / 365) = Y
Cash price x (1 - Y) = answer
Note cost of carry & benefit may be calc’d together e.g. (interest - dividend) x (days/365)… then cash price x (1 - cost of carry) = answer
Basis
= cash price - futures price
Option premium (PM)
= IV + TV
Put/Call Parity Theorem
C - P = S - K
Where C = Call premium, P = Put premium,
S = Underlying price, K = Strike price.
If underlying asset is equity, not a future = C - P = S - ((K / (1 + r)t)
- C, P, S & K are the same
- r = risk free interest rate
- T = time to expiry in years
Delta
= Change in option price / change in underlying asset
Variation Margin
= (Today vs. yday index price) x index point value x no. of contracts
P&L of future contract
= No. of points moved x point value x no. of contracts
Physical delivery Invoice amount
= EDSP (exchange delivery settlement price) x scale factor (or no. of assets) x no. of contracts
Bond future Invoice amount
= EDSP (exchange delivery settlement price) x scale factor (or no. of assets) x no. of contracts + accrued interest
CTD bond contracts to hedge
No. of contracts = price factor x (value of portfolio / value of contract)
calculate the number of Interest-rate futures to correctly hedge?
No. of contracts = (value of portfolio x duration of portfolio) / (interest-rate futures price x duration of underlying asset)
Hedge Ratio (beta)
Covariance (return of stock x return of market) / Variance (return of market)
Multiply no. of contract calc by the beta to get the correct hedge
STIR future hedge ratio
= price change in portfolio given 1 basis point change in yield / price change in STIR future given 1 basis point change in yield
Vertical spread: BULL CALL max risk, max reward and breakeven point (3)
Max risk = net premium paid
Max reward = diff in strike prices - net premium
Break-even point = lower strike price + net premium
Vertical spread: BEAR CALL max risk, max reward and breakeven point (3)
Max risk = diff in strike prices - net premium
Max reward = net premium received
Break-even point = lower strike price + net premium
Vertical spread: BULL PUT max risk, max reward and breakeven point (3)
Max risk = diff in strike prices - net premium
Max reward = net premium received
Break-even point = higher strike price + net premium
Vertical spread: BEAR PUT max risk, max reward and breakeven point (3)
Max risk = net premium paid
Max reward = diff in strike prices - net premium
Break-even point = higher strike price + net premium
Whats a straddle? Why would I go long or short?
Straddle is an option combination. You buy two options for SAME strike price for call & putt.
Long = if increased volatility
Short = if decreased volatility
Whats a strangle? Why would I go long or short?
Strangle is an option combination. You buy two options for DIFFERENT strike price for call & putt.
Long = if increased volatility
Short = if decreased volatility
Intra market?
same horse, different race.
so same 2 assets, different maturities.
Inter market?
different horse, same race.
so 2 different assets, same maturities.
Whats the different approaches for option spreads for Vertical vs. Horizontal vs. Diagonal?
Option spread = buy & sell calls/puts on the same asset
Vertical - in the ground - same expiry, different strike
Horizontal - sideways - different expiry - same strike
Diagonal - mix - different expiry - different strike
What is IV on options ?
IV = strike price vs. underlying asset
How do you find TV on options ?
TV = PM - IV
Can physical commodities carrying cost be negative?
No - but equity index futures carrying costs can be positive or negative
