Pricing Fixed-Income Forward and Futures
A coupon-paying bond’s pricing and valuation are the same as those of a dividend-paying stock. The difference is that the cash flows are coupons and not dividends. Fixed income forward and futures have several problems that are related to the…
Interest Rate Forward and Futures Contracts
The most used interest rate in the derivatives market is the LIBOR which stands for London Interbank Offered Rate. LIBOR is the rate at which London banks can borrow from one another. When the loans are in dollars, they are…
Pricing Equity Forwards and Futures
A forward contract is a contract that promises to buy or sell an asset on a specific date in the future at a prearranged price. We need to construct a portfolio with cash flows equal to the forward to price…
The Carry Arbitrage Model
A carry arbitrage model is a no-arbitrage approach where the underlying asset is either sold or bought and a forward position established. This model accounts for the cost to hold or carry the underlying instrument. The carry costs for an…
Implied Volatility
Implied Volatility We have seen that both the BSM model and Black model require the parameter, \(\sigma\), which is the volatility of the underlying asset price. However, future volatility cannot be observed directly from the market but rather estimated. One…
Risk-Return Characteristics
When the underlying share price is well below the conversion price, the convertible bond exhibits mostly bond risk-return characteristics and is described as a busted convertible. Therefore, the bond will be sensitive to interest rate movements and credit spreads, just…
Time Structure Models
Equilibrium Term Structure Models Equilibrium term structure models are built on theories about the economy. They explain the stochastic process that describes the dynamics of the yield curve (term structure). They are primarily based on macroeconomic variables. That includes inflation,…
Effects of Demographics, Immigration, and Labor Force Participation on the Rate and Sustainability of Economic Growth
Labor Supply The production function shows that economic growth is mainly affected by increased labor and capital. The size of Labor is measured using the total number of hours available for work. The labor force is the proportion of the…
Effect of Natural Resources on Economic Growth
A simple form of the production function, which concentrated on labor and capital inputs, was used in the previous reading. The production function can be extended to include other factors of production, such as: Human capital (H). Raw materials (N)….
Study Notes for CFA® Level II – Economics – offered by AnalystPrep
Reading 8: Currency Exchange Rates: Understanding Equilibrium Value -a. Calculate and interpret the bid-offer spread on a spot or forward currency quotation and describe the factors that affect the bid-offer spread; -b. Identify a triangular arbitrage opportunity and calculate the…
