Value and Price of Swaps
A swap is an agreement between two parties to exchange a series of cash flows, which can also be viewed as a series of forward contracts. Swap pricing is the determination of the initial terms of the swap at the…
European Options
European options only allow for the exercise of options at the expiry date, while American options allow for early exercise. The terms do not convey any information about where, geographically, the options are traded. The right to exercise is a…
The Value of an Option
Aside from the moneyness, time to expiration, and exercise price, other factors determine the value of an option. The risk-free rate, volatility of the underlying and cash flows from the underlying and cost-of-carry impact option values. Time expiration With American-style…
Put-Call Parity for European Options
Although parity means equivalence, puts and calls are not equivalent. However, there is a relationship between the price of a call and its corresponding put option. This is referred to as put-call parity. Protective Puts and Fiduciary Calls First, let’s consider…
Put-Call-Forward Parity for European Options
Another important concept in the pricing of options has to do with put-call-forward parity for European options. This involves buying a call and bond (fiduciary call) and a synthetic protective put, which requires buying a put option and a forward…
Forward Rate Agreements and their Uses
A forward rate agreement (FRA) is ideal for an investor or company who would like to lock in an interest rate. They allow participants to make a known interest payment at a later date and receive an unknown interest payment….
One Period Binomial Model
As the underlying value determines the option payoff, if we know the outcome of the underlying, we know the value of the option. If the underlying is above the exercise price at expiration, then the payoff is ST – X…
European versus American Options
European options can only be exercised at the expiry date, while American options can be exercised ahead of the expiry date. This leads to some circumstances in which the pricing of the two different option types differs. Understand option types…
Components of the Income Statement
The income statement also referred to as the “statement of earnings” or the “profit and loss” (P&L) statement, provides information on the financial performance of a company over a specified period of time. It shows the amount of revenue a…
Principles of Revenue Recognition and Accrual Accounting
General Principles of Revenue Recognition According to IFRS, a company should recognize revenue from the sale of goods whenever the following conditions are satisfied: the company has transferred the significant risks and rewards of ownership of the goods to the…
