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Pricing and Valuing Equity Swap Contracts

Equity Swaps An equity swap is an OTC derivative contract in which two parties agree to exchange a series of cash flows. One party pays a variable series determined by equity, and the other party pays either a variable series…

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Pricing and Valuing Currency Swap Contracts

A currency swap is an agreement between two counterparties to exchange future interest payments in different currencies. The payments can be based on either a fixed interest rate or a floating interest rate. By swapping future interest obligations, the two…

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Pricing and Valuing Interest Rate Swap Contracts

Swaps are typically derivative contracts in which two parties exchange (swap) cash flows or other financial instruments over multiple periods for a give-and-take benefit, usually to manage risk. Both swap contract parties have future obligations. Thus, similar to forwards and…

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Pricing Fixed-Income Forward and Futures

A coupon-paying bond’s pricing and valuation are the same as that 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 related to the carry arbitrage…

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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 that London banks can borrow from one another. When the loans are in dollars, they are referred…

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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…

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The Carry Arbitrage Model

A carry arbitrage model is a no-arbitrage approach where the underlying asset is either sold or bought together with establishing a forward position. These models account for the cost to hold/carry the underlying instrument. The carry cost for an underlying…

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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…

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Study Notes for CFA® Level II – Derivatives – offered by AnalystPrep

Reading 33: Pricing and Valuation of Forward Commitments –a. Describe the carry arbitrage model without underlying cashflows and with underlying cashflows; -b. Describe how equity forwards and futures are priced, and calculate and interpret their no-arbitrage value; -c. Describe how…

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Role of Gamma Risk in Options Trading

Gamma measures the risk that remains once the portfolio is delta neutral (non-linearity risk). The BSM model assumes that share prices change continuously with time. In reality, stock prices do not move continuously. Instead, they often jump, and this creates…

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