Econ 236
  • Rates of Return
    • Holding Period Return
    • Holding Period Return Example
    • Gross and Net Returns
    • Gross and Net Returns
    • Multi-period Returns
    • Annualized Returns - EAR
    • Annualized Returns - APR
    • Annualized Returns - Example
    • Annualized Returns - Example
    • EAR and APR
    • Continuous Compounding
    • Continuous Compounding
    • Inflation
    • Nominal vs. Real Returns
    • Nominal vs. Real Returns
    • Nominal vs. Real Returns - Proof
    • Nominal vs. Real Returns - Example
    • Expected Inflation
    • Expected Inflation
  • Forward Contracts
    • Forward Contract Definition
    • Delivery and Settlement
    • Forward Example
    • Market Prices
    • Early Termination
    • Early Termination Example
    • Notation
    • Forward Valuation
    • Forward Valuation Example
    • Forward Valuation with Income
    • Forward Valuation with Yield
    • Forward Valuation with Yield Example
    • Forward Valuation for Currency
    • Curreny Forward Example
    • Forward Valuation for Commodities
    • Cost of Carry
  • Futures Markets
    • Futures Contracts
    • Role of Exchanges
    • Exchanges
    • Contract Specifications
    • Example: E-mini S&P 500 Contract
    • E-mini S&P 500 Specifications
    • E-mini S&P 500 Specifications
    • Futures Maturities
    • Delivery of Commodities
    • Terminology
    • Volume vs. Open Interest
    • Margin
    • E-mini Margin
    • Example: Gold Futures
    • Example: Gold Futures
  • Trading
    • Exchanges Today
    • Exchanges Today
    • Major U.S. Exchanges
    • Exchanges Today
    • Exchanges Today
    • Exchanges Today
    • Market Makers
    • Takers
    • Order Book Example: time 1
    • Order Book Example: time 2
    • Order Book Example: time 3
    • Order Book Example: time 4
    • Order Book Example: time 5
    • Information Flows
    • SPY Liquidity Response to ES
    • Reasons for Information Flow
    • SPY/E-mini Contract Specs
    • E-mini/SPY Spreads
    • E-mini/SPY Spreads
    • E-mini/SPY Spreads
    • E-mini/SPY Spreads
    • Spread and Information Flow
    • Implications
    • Empirical Results
    • Empirical Results
    • Notes on Results
  • Hedging with Futures
    • Long and Short Hedges
    • Short Hedge Example
    • Long Hedge Example
    • Imperfect Hedging
    • Basis
    • Basis Fluctuation
    • Stylized Basis Fluctuation
    • Actual Basis Fluctuation
    • Hedging and Basis
    • Basis Risk
    • Contract Choice
    • Example: Hedging Yen
    • Cross Hedging
    • Hedge Ratio
    • Hedge Ratio with Returns
    • Hedge Ratio Regression
    • Hedge Ratio
    • Optimal Number of Contracts
    • Hedge Ratio Example
    • Hedge Ratio Example
    • Hedge Ratio Example
    • Hedging an Equity Portfolio
    • Hedging Equity Portfolio Example
    • Hedging Equity Portfolio Example
    • Why Hedge?
    • Changing Beta
  • Futures on Interest Rates
    • Common Interest Rates
    • Day Counts
    • T-bill Quotations
    • Treasury Bond Quotations
    • Accrued Interest
    • Treasury Futures
    • Conversion Factors
    • Treasury Futures Quotations
    • Treasury Futures Quotations
    • Treasury Futures Price
    • Treasury Futures Price Example
    • Treasury Futures Price Example
    • Treasury Futures Price Example
    • Treasury Futures Price Example
    • Eurodollar Futures
    • Eurodollar Futures Quotes
    • Eurodollar Futures Table
    • Eurodollar Futures Example
    • Hedging with Eurodollar Futures
    • Hedging with Eurodollar Futures
  • Forward Rate Agreements
    • Zero Rates
    • Zero Coupon Bond
    • Zero Curve
    • Zero Curve
    • Forward Rates
    • Forward Rate Example
    • Forward Rates: Alternative
    • Notes on Forward Rates
    • Forward Rate Agreements
    • FRA Example
    • FRAs vs Eurodollar Futures
    • FRA Notation
    • FRA Cash Flows
    • FRA Valuation
    • FRA Valuation Example
  • Swaps
    • Swaps
    • Forward/Futures as Swap
    • Interest Rate Swap
    • LIBOR Swap
    • LIBOR Swap Example
    • LIBOR Swap Diagram
    • LIBOR Swap Cash Flows
    • LIBOR Swap Cash Flows with Notional
    • LIBOR Swap Example
    • LIBOR Swap Cash Flows
    • Transforming a Liability
    • Transforming a Liability
    • Transforming a Asset
    • Transforming a Liability
    • Financial Intermediaries
    • Financial Intermediaries Diagram
    • Market Maker Quotes
    • An Important Fact
    • Swap Value: Floating Side
    • Swap Value Diagram
    • Swap Value: Fixed Side
    • Swap Value
    • Swap Value Example
    • Swap Value Example
    • Swap Value Table
    • Swap Value: FRA Portfolio
    • Swap Value Example: FRA Portfolio
    • Swap Value Example: FRA Portfolio
    • Swap Value Example: FRA Portfolio
    • Swap Value Example: FRA Table
    • Currency Swaps
    • Currency Swap Example
    • Currency Swap Example
    • Currency Swap Example
    • Currency Swap: Transforming Liabilities and Assets
    • Currency Swap Valuation: Bonds
    • Currency Swap Valuation Example: Bonds
    • Currency Swap Valuation Example: Bonds
    • Currency Swap Valuation Table: Bonds
    • Currency Swap Valuation: Forward Portfolio
    • Currency Swap Valuation Example
    • Currency Swap Valuation Table: Forward Portfolio
    • Other Currency Swaps
    • Other Swaps
  • Options
    • Options
    • Terminology
    • Underlying Assets
    • Options Exchanges
    • Exchange-Traded Options
    • VIX Options Specs
    • Implications of Options
    • Options as Insurance
    • Obligation of Sellers
    • Call Option Example
    • Call Option Example
    • Put Option Example
    • Put Option Example
    • Moneyness
    • Notation
    • Call Option Payoff (Buyer)
    • Call Option Payoff (Buyer)
    • Call Option Payoff (Buyer)
    • Call Option Payoff (Seller)
    • Call Option Payoff (Seller)
    • Put Option Payoff (Buyer)
    • Put Option Payoff (Buyer)
    • Put Option Payoff (Buyer)
    • Speculation and Hedging
    • Speculation and Hedging
    • Speculation and Hedging
    • Speculation and Hedging
    • Speculation and Hedging
    • Speculation and Hedging
    • Speculation and Hedging
    • Protective Put
    • Protective Put
    • Protective Put
    • Protective Put
    • Covered Call
    • Covered Call
    • Covered Call
    • Straddle
    • Straddle
    • Straddle
    • Straddle
    • Spread
    • Bullish Spread
    • Bullish Spread
    • Collar
    • Protective Put Alternative
    • Protective Put Alternative
    • Put Call Parity
    • Put Call Parity Example
    • Put Call Parity Example
    • Put Call Parity Example
  • Binomial Trees
    • Random Walk
    • Binomial Distribution
    • Bernoulli Random Walk
    • Binomial Tree Example
    • Binomial Tree Example
    • A Riskless Portfolio
    • A Riskless Portfolio
    • Value of the Riskless Portfolio
    • Value of the Riskless Portfolio
    • One-Step Binomial Tree
    • One-Step Binomial Tree
    • One-Step Portfolio
    • One-Step Portfolio
    • Call Option Price
    • Revisiting One-Period Example
    • Two-Step Binomial Tree
    • Two-Step Binomial Tree
    • Two-Step Binomial Tree
    • Two-Step Binomial Tree
    • Two-Step Binomial Tree Example
    • Two-Step Binomial Tree Example
    • Valuing Put Options
    • Two-Step Put Option Example
    • Two-Step Put Option Example
    • American Options
    • American Option Example
    • Delta
    • Call Deltas
    • Put Deltas
    • Stock Return Volatility
    • Binomial Tree Parameters
    • Binomial Tree Parameters
    • Options on Other Assets
    • Options on Other Assets
  • Wiener Processes
    • Stochastic Processes
    • Properties of Expected Value
    • Properties of Expected Value
    • Properties of Variance
    • Properties of Variance
    • Normal Random Variables
    • Additive Normal Example
    • Additive Normal Example
    • Wiener Process
    • Moments of the Wiener Process
    • Wiener Process Over Long Horizon
    • Wiener Process Over Long Horizon
    • Wiener Process Sample Paths
    • Generalized Wiener Process
    • Generalized Wiener Process
    • Wiener Process Comparison
    • Ito Process
    • Model for Asset Prices
    • Model for Asset Prices
    • Geometric Brownian Motion
    • Geometric Brownian Motion
    • Parameter Estimation
    • Simulating Geometric Brownian Motion
    • Simulating Geometric Brownian Motion
    • Ito’s Lemma
    • Ito’s Lemma
    • Ito’s Lemma for Geometric Brownian Motion
    • Application to Forward Contracts
    • Application to Forward Contracts
    • Distribution of Prices
    • Distribution of Prices
    • Lognormal Distribution
    • Simulation Distribution
    • Simulation Distribution
    • Simulation Distribution
  • Black-Scholes-Merton Model
    • Overview
    • BSM Assumptions
    • BSM and Ito’s Lemma
    • A Riskless Portfolio
    • A Riskless Portfolio
    • Boundary Conditions
    • BSM Price of Forward
    • Risk-Neutral Valuation
    • BSM Option Pricing Formulas
    • Normal CDF
    • Interpretation
    • Interpretation
    • Interpretation
    • Extreme Cases
    • Extreme Cases
    • Implied Volatility
    • VIX Index
    • Historical VIX
  • Implied Volatility and the Volatility Term Structure
    • Implied Volatility
    • Put-Call Parity
    • Foreign Exchange Vol Smile
    • Foreign Exchange Implied Distribution
    • Evidence of Heavy Tails
    • Equities Exchange Vol Smile
    • Equities Implied Distribution
    • Volatility Surface
 
Econ 236
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Econ 236 - Financial EngineeringΒΆ

Contents:

  • Rates of Return
  • Forward Contracts
  • Futures Markets
  • Trading
  • Hedging with Futures
  • Futures on Interest Rates
  • Forward Rate Agreements
  • Swaps
  • Options
  • Binomial Trees
  • Wiener Processes
  • Black-Scholes-Merton Model
  • Implied Volatility and the Volatility Term Structure
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© Copyright 2016, Eric M. Aldrich.

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