fm part 2

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Author:
contango
ID:
283401
Filename:
fm part 2
Updated:
2014-10-13 20:03:06
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part
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  1. Macaulay Duration
    • denominator is price P(i)
  2. Modified duration


    • represents sensitivity of price change in the interest rate
  3. Convexity
  4. Duration of a portfolio
    • = present value weighted average of the durations of the individual components.  
    • i.e., Durations are weighted by price
  5. Conditions for Redington immunization
    • 1. 
    • 2.  or duration assets = duration liabilities
    • 3.  or convexity assets > convexity liabilities
  6. Conditions for full immunization with one cash outflow
    • 1. 
    • 2. 
    • 3. There is one cash inflow before and one after the outflow
  7. payoff and profit with purchased call option
    payoff 

    • profit 
    • K is the strike price
    • S_T is the spot price out T years
    • C is the premium for the option
  8. payoff and profit with purchased put option
    • payoff
    • profit 

    • K is the strike price
    • S_T is the spot price out T years
    • C is the premium for the option
  9. payoff for long forward
  10. Protective put
    • Long position in the asset + purchased put
    • Profit equivalent to purchased call
  11. Insuring a short position
    • Short position in the asset + purchased call
    • Profit equivalent to purchased put
  12. Covered call
    • Long position in the asset + written call
    • Profit equivalent to written put
  13. Covered put
    • Short position in the asset + written put
    • Profit equivalent to written call
  14. Put-call parity
    • Call(K,T) - Put(K,T) = PV(F0,T - K)
    • Recall how this relates to synthetic forwards vs long forwards.
    • Note PV(F) = S0
  15. Cash and carry
    • Short forward + purchased stock (with borrowed money)
    • Can be used for arbitrage and market-making
  16. Four ways to buy a stock
    • Outright purchase:
    • Receive stock at time 0
    • Pay S0 at time 0
    • Borrow to pay for stock:
    • Receive stock at time 0
    • Pay S0erT at time T
    • Prepaid forward:
    • Receive stock at time T
    • Pay at time 0
    •  = S0 - PV(dividends)
    • Forward contract:

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