COURSE NOTES Financial Mathematics MTH3251 Modelling in Finance and Insurance ETC 3510. Lecturer: Prof. Fima Klebaner School of Mathematical Sciences Monash University Semester 1‚ 2012 Contents 1 Lecture 1. Introduction. 1.1 Prices of stocks as functions of time . . . . . . . . . . . . . . . . . . 1.2 Simulated functions of time that look like stock prices . . . . . . . . 1.3 Example of modelling using Random Variables . . . . . . . . . . . . 2 Lecture 2. Random variables. Revision. 2.1 Random
Premium Normal distribution Probability theory
forward rate of £1= A$.71 One-year U.S. interest rate = 8.00% One year British interest rate = 9.09% One-year Australian interest rate = 7.00% Question 1 Determining whether triangular arbitrage is feasible and‚ if so how it should be conducted to make a profit. Background: Triangular arbitrage is used to capitalize on a discrepancy that might exist in the exchange rates between two currencies whose transactions are conducted in the spot market. i) Developing the cross exchange rate
Premium Foreign exchange market Exchange rate Central bank
there may be _______________. | | | Student Answer: | distorted; limited arbitrage opportunities | | | distorted; fundamental efficiency | | | allocationally efficient; limitless arbitrage opportunities | | | distorted; allocational efficiency | | | | Comments: | | | | 5. | Question : | (TCO B) The ratio of the average yield on 10 top-rated corporate bonds‚ to the average yield on 10 intermediate-grade bonds is called the __________.
Premium Investment Stock Accounts receivable
7-1 a. A portfolio is made up of a group of individual assets held in combination. An asset that would be relatively risky if held in isolation may have little‚ or even no risk if held in a well-diversified portfolio. b. The feasible‚ or attainable‚ set represents all portfolios that can be constructed from a given set of stocks. This set is only efficient for part of its combinations. c. An efficient portfolio is that portfolio which provides the highest expected return for any degree of
Premium Investment Finance Risk
NUMBER THREE VOLUME XLVIII THE COST OF CAPITAL‚ CORPORATION FINANCE AND THE THEORY OF INVESTMIENT By FRANCO MODIGLIAN1 AND MERTON H. MILLER* What is the "cost of capital" to a firm in a world in which funds are used to acquire assets whose yields are uncertain; and in which capital can be
Premium Investment Corporate finance Finance
the risk-free interest rate (with continuous compounding) is 12% per annum. What is the forward price? Problem 5.4. A stock index currently stands at 350. The risk-free interest rate is 8% per annum (with continuous compounding) and the dividend yield on the index is 4% per annum. What should the futures price for a four-month contract be? Problem 5.9. A one-year long forward contract on a non-dividend-paying stock is entered into when the stock price is $40 and the risk-free rate of interest
Premium Futures contract Short
could be staged for a continued decline over the coming days or weeks. According to the fundamental analysis‚ the euro exchange rates are expected to depreciate in the long-run. Although there was a short uptrend during last week‚ which was driven by yields‚ the investors worry more about deflation and the euro’s resilience. What’s more‚ the ECB rates are highly expected to be cut after ECB’s policy meeting on Thursday. The market is expecting a 25bps reduction in the benchmark rate to 0.50% from the
Premium Inflation Central bank Monetary policy
unrealistic four foundations that can’t be found anywhere in the real market‚ but they are in need to backup the possibility of the main example in this paper‚ which illustrates MM’s assumptions about Propositions I‚ and the assumptions are: 1. Arbitrage is possible between securities in an equivalent return class. 2. We have a “Hybrid Firm” that doesn’t fill in the will known company categories; it has marketable securities like a corporation‚ proration of income like a partnership and allocation
Premium Stock Economics Finance
IEOR E4707: Financial Engineering: Continuous-Time Models c 2009 by Martin Haugh Fall 2009 Black-Scholes and the Volatility Surface When we studied discrete-time models we used martingale pricing to derive the Black-Scholes formula for European options. It was clear‚ however‚ that we could also have used a replicating strategy argument to derive the formula. In this part of the course‚ we will use the replicating strategy argument in continuous time to derive the Black-Scholes partial
Premium Option Options Call option
Policy London whale and JP Morgan • Chief investment office (CIO) at JP Morgan lost perhaps $5.8 billion in London • Part of adjustment to Basel III‚ thought to lower risk–weighted assets • But became a speculative bet on the shape of the yield curve “flawed‚ complex‚ poorly reviewed‚ poorly executed‚ and poorly monitored. The portfolio has proven to be riskier‚ more volatile and less effective as a hedge than we thought‚” Intro Abuse Risk Activities Policy LIBOR scandal •
Premium Hedge fund Short Foreign exchange market