New PDF release: Analysis of Derivatives for the CFA Program

By Don M. Chance

ISBN-10: 0935015930

ISBN-13: 9780935015935

Research of Derivatives for the CFA® software introduces scholars and practitioners to a realistic possibility administration method of derivatives. The textbook captures present perform and displays what the final funding practitioner must find out about derivatives. It doesn't easily convey an evidence of varied derivatives tools and positions yet offers motivation for each derivatives place through explaining what the executive desires to accomplish sooner than addressing the main points of the location.

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Example text

The opportunity exists to make a profit at no risk without committing any of our funds, as demonstrated in Exhibit 1-5B. Suppose we borrow 100 shares of stock AXE. which is selling for $50, and sell short, thereby receiving $5,000. We take $4,750 and purchase 125 shares of stock BYE We invest the remaining $250 in risk-free bonds at 4 percent. This transaction will not require us to put up any funds of our own: The short sale will be sufficient to fund the investment in BYF and leave money to invest in risk-free bonds.

Now let us return to the world of FRAs. FRAs are contracts in which the underlying is neither a bond nor a Eurodollar or Euribor deposit but simply an interest payment made in dollars, Euribor, or any other currency at a rate appropriate for that currency. Our primary focus will be on dollar LIBOR and Euribor, so we shall henceforth adopt the terminology LIBOR to represent dollar LIBOR and Euribor to represent the euro deposit rate. 35 Types of Forward Contracts Because the mechanics of FRAs are the same for all currencies, for illustrative purposes we shall use LIBOR.

We have taken a look at what derivatives are, where they come from, where they are now, why we have them, and what people think of them. Understanding derivatives, however, requires a basic understanding of the market forces that govern derivative prices. Although we shall cover derivative pricing in more detail in later chapters, here we take a brief look at the process of pricing derivatives by examining some important fundamental principles. 7 ELEMENTARY PRINCIPLES OF DERIVATIVE PRICING In this section, we take a preliminary glance at how derivative contracts are priced.

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Analysis of Derivatives for the CFA Program by Don M. Chance


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