1. Forwards and Futures A.

Pay-off for Long Position b) Pay-off for Long Position

Formula S-E Pay-off for Long Position E-S Pay-off for Short Position

S>E Profit Loss

S=E Break Even Break Even

S<E Loss Profit

2. Calculation of Initial Margin: i) When only amount is Given IM=Amount of Initial Margin*Number of contract MM= Amount of MM* Number of contract II) When only Unit Price and Contract Price is given IM= Unit Price*Contract size th MM= (3/4) of Initial Margin III) When % of Initial Margin is Given: IM= (Unit Price* Contract size* Number of contract)* % given MM= (3/4) th of Initial Margin

3. Theoretical Futures Price Using No Arbitrage Principle & Valuation of Index Futures I) Securities providing no Income: II) III)

F=So ert rt Securities providing Known Income: F= (So-I) e e(r-y) t

Where I= Income* e-rt

Where y=Income in %

Securities providing Known Income: F=So

4. Valuation of Index Futures Providing Known Income: Step-1: Market capitalisation of that security expected to pay dividend Weightage= Total Market capitalisation Step-2: Stock Price of the Index * Market capitalisation of that security Value of Stock= Total Market capitalisation Step-3:

Value of Stock Value of Index= Stock Price Step-4:

F= (So-I) ert

5. Optimal Hedging/100% Hedging/Complete Hedge i) Adjusting eta of a portfolio using stock Index futures

p=W11+W22 p=W11+ (1- W1) 2

P (p- p)
II) The Number of Contract required to sell=

F
Value of the spot position requiring
III) 100% Hedge= Value of the Futures Contract * Portfolio Beta

6. Basis = Futures Spot Price

i) ii)

> Spot Price Future price < Spot Price

Future price

Contango Backwardation

7. Futures Hedging Strategies a) To hedge & Modify Market risk of the portfolio. b) To hedge against fall in specific stock price. c) To gain by buying futures ahead of stock purchases or To trade directions d) To speculate. e) To Arbitrage.

2. Options
1. Types of options i) Call Option: Long Call, Short Call ii) Put Option: Long Put , Short Put

Long Call
Buyer of a Call Has Right to Buy, but no Obligation Pay-off: (S-E)-P

Short Call
Seller of a Call Has obligation to sell when buyer exercise Pay-off: (E-S) +P

Maximum Profit: Unlimited Maximum Loss: Premium Paid

Maximum Profit: Premium Received Maximum Loss: Unlimited

Long Put
Seller of Put Has Right to sell, but no obligation Pay-off: (E-S)-P

Short Put
Buyer of a Put Has obligation to buy when buyer exercise Pay-off: (S-E) +P

Maximum Profit: Unlimited Maximum Loss: Premium Paid

Maximum Profit: Premium Received Maximum Loss: Unlimited

2. Option Strategies a) Long Stock, Long Put. b) Long Stock, Short Call. c) Short Stock, Short Call. d) Short Stock, Short Put.

3. Spreads and Combinations Spreads

a) Bulls Spreads:
Position i) Bulls Spreads with call options: Long Call (E1) & Short Call (E2) Long Put (E1) & Short Put (E2) Condition E2>E1 Expiry Date Same

ii) Bulls Spreads with put option:

E2>E1

Same

b) Bear Spreads: Position i) Bear Spreads with call options: Long Call (E1) & Short Call (E2) Long Put (E1) & Short Put (E2) Condition E1>E2 Expiry Date Same

ii) Bear Spreads with put option:

E1>E2

Same

Long Call (E1) c) Butterfly Spreads: Same 2 Short Call (E2) Long Call (E3) E3>E1 & E2= Avg of E1&E3

Combinations
a) Straddle
i) Top Straddle/Write Straddle: Short Call (E1) & Short Put (E2) E1=E2 Same

Long Call (E1) ii) Bottom Straddle/Straddle Purchase: & Long Put (E2) E1=E2 Same

b) Strangle
i) Long Strangle:

Position
Long Call (E1) & Long Put (E2)

Condition

Expiry Date

E1=E2

Same

ii)

Short Strangle:

Short Call (E1) & Short Put (E2)

E1=E2

Same

Long Call (E1) c) Strips: & 2 Long Put (E2) E1=E2 Same

2Long Call (E1) d) Straps: & Long Put (E2) E1=E2 Same

2 Long Call (E1) e) Condor : & 2 Short Call (E1) E2>E1 Same

Option Pricing
a) Put- Call Parity P+S=C+PV(X) When P+S C+PV(X) Leads to Arbitrage Let Assume P+S=Portfolio-A C+PV(X)= Portfolio-B

i)

Determination of Arbitrage Profit: When A>B Pay-off From Expiration Portfolio Long Call Short Stock Short Put Total S=E 0 S 0 SorE S<E 0 -S - (E-S) -E S>E S-E -S 0 -E

i)

Determination of Arbitrage Profit: When A>B

Pay-off From Expiration Portfolio Long Stock Long Put Short Call Total S=E S 0 0 SorE S<E S (E-S) 0 E S>E S -(S-E) 0 E

b) Option Valuation Model:

i) Binomial Model ii) Black-Scholes Model i) Binomial Model:

Cu-Cd So (u-d)

= Number of Shares to be Purchased Cu= Max (uSo-E, 0) Cd= Max (dSo-E, 0)

U= 1+% change in stock Price if stock price increases

d= 1+% change in stock Price if stock price decreases
Cash Flow@ t=0 Portfolio 2 Short call Long Stock Borrow Total 2C -S ? X Cash Flow@ t=1 S1=Lower Price S2=Higher Price (E-S) (E-S) S1 S2 0 0

Cu C=

i-d u-d

+ Cd

u-i u-d

C= Call Price i= (1+r/n)

ii)

Black-Scholes Model:

C=So N (d1)-E e-rt N (d2)

Where C= Call Price P= Put Price

P=Ee-rt N (-d2)-So N (-d1)

ln (So/E) +(r-0.52)t d1=

S*=So-Do Derivatives of Black-Scholes Model a) Delta(): P=-C+ N (d1) So

d2=d1- t

Note: When Dividend is given in Rupees then

b) Gamma():

Z (d1) Where So Z (d1)=

e-d12/2 t
2

c) Theta(): So Z (d1) i) (Call)= 2 t Ee-rt r N(d2)

So Z (d1)

ii) (Put)= 2 t

+ Ee-rt r N(-d2)

d) Rho ():

(Call) =E t e-rt N (d2) (Put) = - E t e-rt N (-d2) e) Lambda (): =So t * Z (d1)

Expiration to Call & Put Options E P- C+ So

Ln t=