As expiration nears, gamma of at-the-money options increases and the bell-curve-shaped chart of gamma becomes more peaked. If we think of gamma as a measure of option’s instability, it is no surprise that those options which are at the money and with very little time to expiration are the most instaRead more
As expiration nears, gamma of at-the-money options increases and the bell-curve-shaped chart of gamma becomes more peaked. If we think of gamma as a measure of option’s instability, it is no surprise that those options which are at the money and with very little time to expiration are the most instable, with highest gamma.
Conversely, as expiration approaches, both out-of-the-money and in-the-money options lose gamma. Both ends of the bell curve are pushed even closer to zero.
This is for both Hitarth and Ananta. When you buy a forward on a T-Bond, you agree to buy a bond at a future date. Now, this date might be on the coupon date or it might not be on the coupon date. When this date is not on the coupon date, you are receiving interest that you should not receive becausRead more
This is for both Hitarth and Ananta.
When you buy a forward on a T-Bond, you agree to buy a bond at a future date. Now, this date might be on the coupon date or it might not be on the coupon date. When this date is not on the coupon date, you are receiving interest that you should not receive because you never invested money for that time period. (The “time period” referred to here is the time span between the last coupon date and forward contract maturity i.e the date on which you buy the bond.) So, that is something you have to pay for in the bond itself.
Alternatively, you can think of it this way :
Jab aap aaj bond khareedte ho, aapko next coupon milega. But last coupon date se leke aaj tak kisi aur ne paisa lagaya tha. Toh utna “proportionate” interest unka haqq ka hai, naaki aapka. Toh aap bond price mei utna proportionate interest add karke aaj pay karte ho.
Case : Inflation is lower than expected projected actual Inflation 3% 2% The company issues a fixed rate bond at 6% p.a (say) by keeping in mind the expected inflation. However, it overestimated the inflation. Had it known the actual magnitude of inflation earlier, it would have issued the bond at 5Read more
Case :
Inflation is lower than expected
projected
actual
Inflation
3%
2%
The company issues a fixed rate bond at 6% p.a (say) by keeping in mind the expected inflation. However, it overestimated the inflation. Had it known the actual magnitude of inflation earlier, it would have issued the bond at 5% p.a. This would result in lower after-tax interest expense. But, since the company overestimated the inflation, it’s after tax interest expense is higher than what it could have been.
Regarding depreciation, the amount of depreciation is fixed and hence, the tax shield provided by depreciation is also fixed. So, when inflation is lower than expected (when your money is worth more than you expected), your real (inflation hatake) tax savings from depreciation is higher.
Think of it this way - Callable bond = Interest rate girne ka darr. If the interest rate falls, the bond price will rise and the company (issuer) will call the bond. Then, you will have to invest your money elsewhere at the fallen interest rates. In a receiver swaption, you receive fixed and pay floRead more
Think of it this way –
Callable bond = Interest rate girne ka darr. If the interest rate falls, the bond price will rise and the company (issuer) will call the bond. Then, you will have to invest your money elsewhere at the fallen interest rates.
In a receiver swaption, you receive fixed and pay floating. However, when you short the same, you pay fixed and receive floating. Here again, you have interest rate girne ka darr.
RESIDUAL INCOME
Dipesh's Doubt PFA the excel sheet showing the entire calculation in a comprehensive manner. Hope this helps!
Dipesh’s Doubt
PFA the excel sheet showing the entire calculation in a comprehensive manner.
Hope this helps!
See lessDerivative- Gamma
As expiration nears, gamma of at-the-money options increases and the bell-curve-shaped chart of gamma becomes more peaked. If we think of gamma as a measure of option’s instability, it is no surprise that those options which are at the money and with very little time to expiration are the most instaRead more
As expiration nears, gamma of at-the-money options increases and the bell-curve-shaped chart of gamma becomes more peaked. If we think of gamma as a measure of option’s instability, it is no surprise that those options which are at the money and with very little time to expiration are the most instable, with highest gamma.
Conversely, as expiration approaches, both out-of-the-money and in-the-money options lose gamma. Both ends of the bell curve are pushed even closer to zero.
See lessRegression
This is the answer given to the questions. Please let me know which part is unclear.
This is the answer given to the questions. Please let me know which part is unclear.
See lessMultifactor Model – Calculation
Your approach seems correct and there seems to be a clerical error in the institute's question. I suggest you mail the institute about the same.
Your approach seems correct and there seems to be a clerical error in the institute’s question. I suggest you mail the institute about the same.
See lessPlz explain why Required rate of return is taken as ROE here in Q44?
When there are no means of calculating ROE, we take Re as ROE.
When there are no means of calculating ROE, we take Re as ROE.
See lessPricing and valuation of forward commitments
This is for both Hitarth and Ananta. When you buy a forward on a T-Bond, you agree to buy a bond at a future date. Now, this date might be on the coupon date or it might not be on the coupon date. When this date is not on the coupon date, you are receiving interest that you should not receive becausRead more
This is for both Hitarth and Ananta.
When you buy a forward on a T-Bond, you agree to buy a bond at a future date. Now, this date might be on the coupon date or it might not be on the coupon date. When this date is not on the coupon date, you are receiving interest that you should not receive because you never invested money for that time period. (The “time period” referred to here is the time span between the last coupon date and forward contract maturity i.e the date on which you buy the bond.) So, that is something you have to pay for in the bond itself.
Alternatively, you can think of it this way :
Jab aap aaj bond khareedte ho, aapko next coupon milega. But last coupon date se leke aaj tak kisi aur ne paisa lagaya tha. Toh utna “proportionate” interest unka haqq ka hai, naaki aapka. Toh aap bond price mei utna proportionate interest add karke aaj pay karte ho.
Hope this helps!
See lessPricing of bond
Because the bond is callable after 1 year. This possibility is not covered by the 3-year spot rate.
Because the bond is callable after 1 year. This possibility is not covered by the 3-year spot rate.
See lessPresentation
https://drive.google.com/drive/folders/1geLcVa2QnpCri11JasLglbG2UVOZ6S3V?usp=sharing
https://drive.google.com/drive/folders/1geLcVa2QnpCri11JasLglbG2UVOZ6S3V?usp=sharing
See lessplease explain how inflation will impact tax savings from dep and int exp
Case : Inflation is lower than expected projected actual Inflation 3% 2% The company issues a fixed rate bond at 6% p.a (say) by keeping in mind the expected inflation. However, it overestimated the inflation. Had it known the actual magnitude of inflation earlier, it would have issued the bond at 5Read more
Swaptions
Think of it this way - Callable bond = Interest rate girne ka darr. If the interest rate falls, the bond price will rise and the company (issuer) will call the bond. Then, you will have to invest your money elsewhere at the fallen interest rates. In a receiver swaption, you receive fixed and pay floRead more
Think of it this way –
Callable bond = Interest rate girne ka darr. If the interest rate falls, the bond price will rise and the company (issuer) will call the bond. Then, you will have to invest your money elsewhere at the fallen interest rates.
In a receiver swaption, you receive fixed and pay floating. However, when you short the same, you pay fixed and receive floating. Here again, you have interest rate girne ka darr.