Determining the Value at Expiration and Profit from a Long or a Short Position in a Call or Put Option
Define the following: \(c_T =\) Value of the call at expiration. \(p_T =\) Value of a put option at expiration. \(S_T =\) Price of the underlying at time T. \(X =\) Exercise price. \(c_0=\) Call option premium. \(p_0 =\) Put…
Basic Features of Derivative Markets
Over-the-Counter (OTC) Derivative Markets OTC derivative markets can be formal institutions such as NASDAQ or an information connection of parties who buy from and sell to one another. In OTC derivative markets, derivatives end-users enter contracts with dealers or a…
Forward Contract
A forward contract is an over-the-counter (OTC) derivative contract. In this contract, two parties agree that one party, the buyer (long), will purchase an underlying asset from the other party, the seller (short), at a later date at a fixed…
Defining Derivative and the Basic Features of a Derivative Instrument
What is a Derivative? A derivative is a financial instrument that derives (obtains) its value from the performance of an underlying. The underlying may be a single asset, a group of assets, or variables such as interest rates. Creation of…
Expected Value, Variance, Standard Deviation, Covariances, and Correlations of Portfolio Returns
A portfolio is a collection of investments a company, mutual fund, or individual investor holds. A portfolio consists of assets such as stocks, bonds, or cash equivalents. Financial professionals usually manage a portfolio.
Data Visualization
Data visualization refers to the presentation of data in a pictorial or graphical format using different graphs such as histograms, polygons, line charts, bar charts, etc. Histogram A histogram is a graphical representation of the data contained in a frequency…
Contingency Tables
A contingency table is a tabular representation of category-based data. It shows the frequencies for particular combinations of values for two discrete random variables, say X and Y. Each cell in the table represents a mutually exclusive combination of X-Y…
Data Organization for Quantitative Analysis
Typically, raw data can be organized into the following two formats for quantitative analysis: One-dimensional array: A one-dimensional array is the simplest format for representing a single variable, such as the daily trading volume of the stock exchange. Two-dimensional rectangular…
Using Timelines in Modeling and Solving Time Value of Money Problems
A timeline is a physical illustration of the amounts and timing of cashflows associated with an investment project. For cashflows that are regular and of equal amounts, the standard annuity formula or the financial calculator can be used. However, for…
Present Values, Future Values, Annuities, and Series of Unequal Cashflows
Future Values The Future Value (FV) of a Single Sum of Cash Flow The Future Value (FV) of a single sum of money is the amount that money invested today at a given interest rate (r) for a specified period…
