3.6 Conversion Formulas (Pages 52, 53) Define Rc: continuously compounded rate Rm: same rate with compounding m times per year R R=mIn 1+-m 77 AeRen=A1+m Rm= mle r/m EXamples:3.1, 3.2(page 53) Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.6 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Conversion Formulas (Pages 52,53) • Define Rc : continuously compounded rate Rm: same rate with compounding m times per year Examples: 3.1, 3.2(page 53)
3.7 Short selling (Page 53) Short selling involves selling securities you do not own Your broker borrows the securities from another client and sells them in the market in the usual way Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.7 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Short Selling (Page 53) • Short selling involves selling securities you do not own • Your broker borrows the securities from another client and sells them in the market in the usual way
3.8 Short selling (continued At some stage you must buy the securities back so they can be replaced in the account of the client You must pay dividends other benefits the owner of the securities receives Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.8 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Short Selling (continued) • At some stage you must buy the securities back so they can be replaced in the account of the client • You must pay dividends & other benefits the owner of the securities receives
3.9 Assumptions and notations The market participants are subject to no transaction costs when they trade are subject to the same tax rate on all net trading profits can borrow money at the same risk-free rate of interest as they lend money take advantage of arbitrage opportunities as they occor Notations T: time when the forward contract matures ( years) So: price of asset underlying the forward contract today Fo: forward price today r: risk-free rate of interest per annual with continuous compounding, for an investment maturing at T Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.9 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Assumptions and Notations The market participants • are subject to no transaction costs when they trade • are subject to the same tax rate on all net trading profits • can borrow money at the same risk-free rate of interest as they lend money • take advantage of arbitrage opportunities as they occor Notations: T: time when the forward contract matures (years) S0 : price of asset underlying the forward contract today F0 : forward price today r: risk-free rate of interest per annual, with continuous compounding, for an investment maturing at T