Asset Pricing and Derivatives Spring 2012

Formula Sheet
Written By: Omar Adnan Alismail

1 / 7

Week 0 Hull Chp. 4

R
c
= mln _1 +
R
m
m
]
Week 1 Lecture 1 and Hull Chp. 1, 2, and 5
Forward price for an investment asset:
F
0
= S
0
c
1

Forward price for an investment asset with known income (I):
F
0
= (S
0
- I)c
1

Forward price for an investment asset with known yield (q):
F
0
= S
0
c
(-q)1

Value of forward contract at date t:
No Ji:iJcnJ:
t
= S
t
- Kc
-(1-t)

Known Ji:iJcnJ yiclJ:
t
= S
t
c
-q(1-t)
- Kc
-(1-t)

Forward price on a currency:
F
0
= S
0
c
(R
DC
-R
FC
)1

Future price with storage costs
F
0
= S
0
c
(+u)1

Consumption assets with convenience yield
F
0
= S
0
c
(+u-)1

Cost of Carry
The relationships between futures and spot can be summarized in terms of cost of carry, c.
1. Non-dividend stock: c = r
2. Stock index: c = r q
3. Currency: c = r
DC
r
FC

4. Commodity: Currency: c = r q + u
Future price and expected future spot price
F
0
= E(S
t
)c
(-k)1


Asset Pricing and Derivatives Spring 2012
Formula Sheet
Written By: Omar Adnan Alismail

2 / 7

Week 2 Lecture 2 and Hull Chp. 9 and 10

Factors affecting option prices:
Increase In: European Call European Put American Call American Put
Stock Price

Strike Price

Time to Expiration ? ?

Volatility

Risk-free

Dividends


Lower/upper bounds on call/put options (assuming no dividends):
Hox(u, S
0
- Kc
-1
) c, C S
0

Hox(u, Kc
-1
-S
0
) p Kc
-1

Hox(u, K - S
0
) P K
Lower/upper bounds on call/put options (D is present value of dividends):
Hox(u, |S
0
-] -Kc
-1
) c, C S
0

Hox(u, Kc
-1
- |S
0
-]) p Kc
-1

Hox(u, K - |S
0
-]) P K
Put-call Parity (European options; D is present value of dividends):
c + Kc
-t
= p +S
0

c + Kc
-t
= p + |S
0
- ]
Put-call Parity (American options; B = c
-1
and D is present value of dividends):
S - - K C - P S - K. B

Week 3 Lecture 3 and Hull Chp. 12
Option price using Binomial Tree:
= c
-1
|p
u
+ (1 -p)
d
]
Pseudo (Risk-Neutral) Probability:
p =
c
1
- J
u - J


Asset Pricing and Derivatives Spring 2012
Formula Sheet
Written By: Omar Adnan Alismail

3 / 7

Parameters related to the Replicating Portfolio of Option Pricing

(Jclto -sborcs pcr option) =
oC
oS
=
C
u
- C
d
S
u
- S
d
=
C
u
-C
d
S(u - J)

I(bonk trosnoction -borrowing) =
JC
u
-uC
d
r(u - J)

Parameterizing the Model
u = c
c1n
= c
ct

J =
1
u
= c
-c1n
= c
-ct

Options on other assets:
Stock inJcx: p =
c
(-q)t
-J
u - J

Currcncy: p =
c
(
DC
-
FC
)t
-J
u - J

Futurcs: p =
1 -J
u - J

Week 4 Lecture 4 and Hull Chp. 13 and 14
Geometric Brownian motion:
JS
S
= p Jt +o Jz
JS
1
S
t
~(p(I - t), o
2
(I - t))
It Lemma Taylors Expansion where f is a function of t and S f(t,S):
J =
o
ot
Jt +
o
oS
JS +
1
2
o
2

ot
2
(Jt)
2
+
1
2
o
2

oS
2
(JS)
2
+
o
oSot
JtJS
SDE for any derivative whose value is dependent on t and S f(t,S):
J = _
o
ot
+
o
oS
p S +
1
2
o
2

oS
2
o
2
S
2
_Jt +
o
oS
o SJz
Distribution of stock price
lnS
1
~_lnS
0
+ _p -
1
2
o
2
] I, o
2
I_

Asset Pricing and Derivatives Spring 2012
Formula Sheet
Written By: Omar Adnan Alismail

4 / 7

Black-Scholes differential equation:

o
ot
+
o
oS
r S +
1
2
o
2

oS
2
o
2
S
2
= r
Black-Scholes Formulae:
c = C(non - Ji:iJcnJ poying stock) = S
0
N(J
1
) - Kc
-(1-t)
N(J
2
)
p = Kc
-(1-t)
N(-J
2
) - S
0
N(-J
1
)
J
1
=
ln [
S
0
Kc
-(1-t)

oI - t
+
oI - t
2

J
2
= J1 - oI -t
Black-Scholes Approximation:
If the option is American, exercise is only optimal if

n
> K(1 -c
-(1-t
n
)
)
Week 5 Lecture 5 and Hull Chp. 16, 17 and 18
B-S formulae for options on stock paying dividend yield of q
c = S
0
c
-q(1-t)
N(J
1
) - Kc
-(1-t)
N(J
2
)
p = Kc
-(1-t)
N(-J
2
) - S
0
c
-q(1-t)
N(-J
1
)
J
1
=
ln _
S
0
c
-q(1-t)
Kc
-(1-t)
_
oI - t
+
oI - t
2

J
2
= J1 - oI -t
B-S formulae for European currency options
c = S
0
c
-
FC
(1-t)
N(J
1
) - Kc
-
DC
(1-t)
N(J
2
)
p = Kc
-
DC
(1-t)
N(-J
2
) -S
0
c
-
FC
(1-t)
N(-J
1
)
J
1
=
ln_
S
0
c
-
FC
(1-t)
Kc
-(1-t)
_
oI - t
+
oI - t
2

J
2
= J1 - oI -t

Asset Pricing and Derivatives Spring 2012
Formula Sheet
Written By: Omar Adnan Alismail

5 / 7

B-S formulae for options using forward contract with dividend yield of q/ foreign currency of r
FC

c = c
-(1-t)
|F
0
N(J
1
) - KN(J
2
)]
p = c
-(1-t)
|KN(-J
2
) - F
0
N(-J
1
)]
J
1
=
ln[
F
0
K

oI - t
+
oI - t
2

J
2
= J1 - oI -t
Pdf of normal distribution
N
i
(x) =
1
2n
c
-
x
2
2

General result useful in deriving Greeks:
SN
i
(J
1
) = Kc
-:
N
i
(J
2
)
The Greeks:
Call Put
N(J
1
)

-N(-J
1
)

-oSN
i
(J
1
)
2I -t
- rKc
-(1-t)
N(J
2
)

-oSN
i
(J
1
)
2I - t
+ rKc
-(1-t)
N(-J
2
)

N
i
(J
1
)
So


N
i
(J
1
)
So

v S
0
N
i
(J
1
)


S
0
N
i
(J
1
)

rbo Kc
-(:)
N(J
2
) -Kc
-(:)
N(-J
2
)

Week 6 Lecture 6 and Hull Chp. 19
Pdf for risk-neutral expectation of options
g(K) = c
t
o
2
c
JK
2


g(K) = c
t
c
1
+ c
3
- 2c
2
o
2




Asset Pricing and Derivatives Spring 2012
Formula Sheet
Written By: Omar Adnan Alismail

6 / 7

Variance Swap Payoff:

(o
R
2
- K
u
)N
Implied Volatility and Distribution Equities:


Implied Volatility and Distribution FX:



Week 7 Lecture 7 and Hull Chp. 7
Value of a plain-vanilla swap using PV method:
I
]xcd-puc
= B
]Ioutng
- B
]xcd

I
]Ioutng-puc
= B
]xcd
- B
]Ioutng

Value of a currency swap (pay DC and receive FC):
I
t=0
= |P
C
-X
0
P
PC
] + |X
0
B
PC
t=0
- B
C
t=0
]
I
t=:
= X
t
B
PC
t=
-B
C
t=
wbcrc > u



Asset Pricing and Derivatives Spring 2012
Formula Sheet
Written By: Omar Adnan Alismail

7 / 7

Week 8 Lecture 8
Value of companys capital structure:
Equity = c
cbt = PI(K) - p
A
0
= c +|PI(K) p]
c + PI(K) = A
0
+ p
Value of companys complex capital structure:
Scnior cbt = K
1
- P(I, K
1
) = I - C(I, K
1
)

Equity = C(I, K
1
+ K
2
)

[unior cbt = C(I, K
1
) - C(I, K
1
+ K
2
)

Warrants Pricing:
w(I) = o max (u, I(I) -
1 -o
o
K)

Convertible Bonds bondholders convert when:

I(I) >
K
y


E
1
= C(I(I), K) -y C _I(I),
K
y
]

B
t
= I
t
-E
t
= |I
t
- C(I(I), K)] + y C _I(I),
K
y
]