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…
Assets, Liabilities, and Equity
The balance sheet is also known as the statement of financial position or statement of financial condition. It is a financial statement that gives a snapshot of a company’s assets, and its sources of capital, i.e., liabilities and shareholder’s equity,…
Uses and Limitations of the Balance Sheet
The balance sheet can provide very useful information to users of financial statements. It, however, has several limitations. Uses of the Balance Sheet The balance sheet gives insight into a company’s financial condition at a particular point in time. It…
Convert Balance Sheets to Common-size Balance Sheets
Converting a company’s balance sheet into a common-size balance sheet is a very useful tool for providing insight into a company’s liquidity as well as its solvency. Common-sizing the balance sheet can assist with time-series analysis by comparing the company’s…
Calculate and Interpret Liquidity and Solvency Ratios
Ratio analysis can assist with the conduct of time-series and cross-sectional analysis of a company’s financial position. Balance sheet ratios are those ratios that involve balance sheet items only and include (i) liquidity ratios, which measure a company’s ability to…
