Formulas sheet for the exam in Risk Management for BA

March 30, 2011

CH3. Basis in a hedging situation Basist = St Ft where St is spot price of asset to be hedged and Ft is futures price of contract used. CH3. Minimum variance hedge ratio h = S F

where S is the standard deviation of change in spot price S, F is the standard deviation of change in futures price F , is the coecient of correlation between the two. CH3. Optimal number of contract for hedging N = h QA QF

where h is minimum variance hedge ratio, QA is size of position being hedged (units), and QF is size of one futures contract (units). CH4. Rc is a rate of interest with continuous compounding and Rm is the equivalent rate with compounding m times per annum, then Rc = mln(1 + Rm Rm ) m = m(eRc /m 1) 1

CH4. RF is the forward interest rate for the period of time between T1 and T2 , R2 T2 R1 T1 RF = T2 T1 where R1 and R2 are the zero rates for maturities T1 and T2 . CH4. VF RA is the value of the FRA: VF RA = L(RF RK )(T2 T1 )eR2 T2 where L is the principal underlying the contract, RK is the interest rate agreed to in the FRA, RF is the forward interest rate for the period between times T1 and T2 calculated today, R2 is the zero rate for maturity T2 . CH5. F0 is the forward price of a forward contract on an investment asset with price S0 that provides no income: F0 = S0 erT where r is risk-free rate and T is the time to maturity. CH5. Forward price of a forward contract on an investment asset that provides income with a present value of I during the life of a forward contract: F0 = (S0 I)erT when the income is expressed as a percent of the assets price at the time the income is paid, namely yield (q), forward price is F0 = S0 e(rq)T CH5. Futures price of a stock index F0 = S0 e(rq)T where q is the dividend yield rate.

CH5. f is the value of a long forward contract today: f = (F0 K)erT where K is the delivery price in the contract, F0 is the current forward price for a contract that was negotiated some time ago, the delivery date is T years from today, r is the T-year risk-free rate. CH5. F0 is the forward or futures price in dollars of one unit of foreign currency: F0 = S0 e(rrf )T where S0 is the current spot price in dollars of one unit of the foreign currency, r and rf are respectively the US dollar and foreign risk-free interest rates when money is invested for time T . CH5. Forward price of a forward contract on a consumption asset: F0 = (S0 + U )erT where U is the present value of all the storage costs during the life of a forward contract. CH6. Cash price to be paid by the purchase of the bond: quoted price+accrued interest since last coupon date Cash price received by the short party when delivering the bond: most recent settlement price conversion factor + accrued interest CH6. Duration of a bond
n

D=
i=1

ti [

ci eyti ] B

where y is bond yield, ci is coupon at time ti . CH6. Number of contracts required to hedge against uncertain y is: N = P DP VF DF 3

where y is change in the yield, VF is contract price for one interest rate futures contract, DF is duration of the asset underlying the futures contract at the maturity of the futures contract, P is forward value of the portfolio being hedged at the maturity of the hedge, usually assumed to be the same as the portfolio value today, DP is duration of the portfolio at the maturity of the hedge. For the following formulas, c is the price of a European call option, p is the price of a European put option, S0 is stock price, K is strike price, r is continuously compounded risk free rate. T is time to expiration of the option. D and q are respectively the present value of the dividends and dividend yield during the life of the option. is the volatility of the stock price. CH10. Upper bounds, lower bounds, and put-call parity: c S0 ; c S0 D KerT p KerT ; p D + KerT S0 c + D + KerT = p + S0 CH13. Black-Scholes-Merton formula: c = (S0 D)N (d1 ) KerT N (d2 ) p = KerT N (d2 ) (S0 D)N (d1 ) ln((S0 D)/K) + (r + 2 /2)T d1 = T ln((S0 D)/K) + (r 2 /2)T d2 = = d1 T T CH17. Delta of a call is eqT N (d1 ), Delta of a put is eqT [N (d1 ) 1].