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The Black-Scholes Model - Article
The Black-Scholes model is the best known of all the techniques for valuing options. It is used in the pricing of both options and futures and forms the basis for formulas pricing exotic options such as barriers, compounds and Asian options. It also enabled the derivation of the 'Greeks' of option pricing. It is more difficult to adapt to value interest rate options because one of the model's u... |
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Assumptions of Black-Scholes - Article
The basic structure of the Black-Scholes model shows that the value of the call option on a stock is a function of the present values of both purchasing the stock outright and paying the exercise price on the day the option expires.... |
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Volatility in Black-Scholes - Article
In this article, we look at the role of volatility in the Black-Scholes model.... |
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Black-Scholes and American-style options - Article
The Black-Scholes model values options as the difference between the present value of the stock on expiration day and the present value of exercising the option on expiration day. There is more detail on the derivation of the model in Treasury Today October 2004, December 2004 and January 2005.... |
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The use of Black-Scholes to value currency options - Article
Black-Scholes plays an important role in valuing stock options. For the corporate treasurer, it is more likely to be necessary to value the currency and interest rate options used to hedge financial exposures, particularly if hedge accounting is not used.... |
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An Introduction to the yield curve - Article
In this article we introduce the concept of the yield curve.... |
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The purpose of a yield curve - Article
This article explores the purpose of the yield curve and explains what is meant by ‘playing the yield curve’. ... |
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Measuring the yield - Article
We review yield measurements – of which there are several. The principal ones are yield to maturity and current yield. Here we examine the former.... |
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The current yield - Article
The current yield measurement is also known as the running yield, flat yield and income yield. It is calculated by dividing the income received per annum (ie annual coupon of interest payments) by the purchase price of the investment excluding any accrued interest. Therefore, unlike the YTM measurement, it does not take into account any capital gained or lost on redemption/sale.... |
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Types of yield curve - Article
We explore different bases for yield curves.... |
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Constructing a zero-coupon yield curve - Article
We explain how to construct a zero-coupon yield curve, considering two-year and three-year maturities. Zero-coupon yield curves can actually be constructed from a series of coupon-paying bonds. This is a technique known as ‘bootstrapping’. For example, consider the following bonds which pay annual coupons and have a maturity of two and three years respectively.... |
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Drawing a zero-coupon yield curve - Article
The yield curve part VII – A series of zero-coupon rates can be calculated from a number of coupon-paying bonds with different maturities using a technique called 'bootstrapping'. We have calculated the zero-coupon rates for two and three year bonds and added data for a four year bond. The resultant table of values has been used as the basis for a yield curve plot.... |
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Calculating the proceeds of a long-term investment - Article
For investments made over longer periods, it is normal for coupons or interest payments to be paid. These payments can themselves be invested for the remaining term of the investment. This 'compounds' the return. So while the proceeds of this investment are strictly only from these coupons or interest payments, the reinvestment of the monies received produces an additional return which is calcu... |
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Simple and compound interest - Article
Simple and compound interest... |
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Return on Invested Capital (ROIC) - Article
Return on Invested Capital (ROIC)
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Interpolating interest rates - Article
Interpolation is the practice of estimating a price on a particular date by comparing it to prices on adjacent dates. Interest rates are usually quoted for standard periods – for example, one month, two months, three months or six months. In order to calculate an interest rate for a period between these standard periods, it is necessary to interpolate a rate from the two nearest given rates. ... |
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Bond Pricing – part I - Article
Bond Pricing – part I
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Bond Pricing – part II - Article
Last month, we looked at how a basic coupon paying bond structure is priced. This month, we explain how to price a bond that has no coupon.... |
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Cost of debt - Article
Work out the cost of debt... |
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Kelly formula - Article
Information on the Kelly formula
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Cash Conversion Cycle - Article
The cash conversion cycle (CCC) is the average time in days that it takes a company to convert the spending of cash for raw materials and other supplies into the receipt of cash through the sale of products or services to customers. It is a fundamental measure of working capital and supply chain management...
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Price-earnings ratio - Article
The price-earnings ratio values a share by comparing a company’s share price to its per-share earnings. It is used to measure the relative cost of a share as it illustrates how much money the investor has to pay for each €1 of the company’s earnings.... |
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Price Earnings to Growth ratio (PEG ratio) - Article
The price earnings to growth ratio (PEG ratio) attempts to determine a share’s value by taking into account the company’s earnings growth. It gives a potential indication as to how the market values the share’s growth potential in relation to the earnings per share (EPS) growth.... |
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Discounted cash flow (DCF) - Article
Discounted cash flow (DCF)... |
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The Altman Z-Score - Article
The Z-score model was developed by Edward Altman in 1968 to predict the likelihood of a company’s bankruptcy. ... |
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Interest coverage ratio - Article
Interest coverage ratio... |
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EV/EBITDA - Article
EV/EBITDA, also known as the enterprise multiple, is a ratio that is used to determine the value of a business compared to its earnings before interest, tax, depreciation and amortisation. ... |
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Current ratio and acid-test ratio - Article
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