Some Useful Formulas

Discounting:
1
PvF=
Present Value ( 1+r )T

∞
1 1
PV =∑ =
Perpetuity t=1 (1+r )
t r

T
1 1 1
PV ann=∑ t
= −
Annuity t =1 ( 1+ r ) r r ( 1+r )T

D0 (1+ g ) D
P= == 1
Constant-Growth DDM1 k −g k−g

Bonds2
T
Coupon Par
P=∑ +
Bond Pricing t =1 ( 1+ y ) ( 1+ y )T
t

Realised Compound Yield Investment ×(1+ y realised )T =TotalPayoff

annualreturn
ETY =
Yield adjustment for tax-exempt bonds 1−(taxrate )

(1+ t Rn+1 )n+1

t+n r 1 = −1
Forward rate formula (1+ t R n )n
T
∑ t CF
t =1
D= t
¿¿
Macauley’s duration (1 + y ) ¿ Price

D
Dmod =
Modified Duration of a bond 1+ y
ΔP
×100=−Dmod × Δy
Modified duration and bond price P

[ ]
T CF t
1
C= 2 ∑ t
( t2+ t )
Convexity of a coupon bond3 P×( 1+ y ) t =1 ( 1+ y )

1
g = Retention Rate × Rate of return on investment = RR × ROE
2
The figures are per period: y is the yield per period, while T is the total number of periods. For example, for semi-
annual payments, 10 years are T=20 and an 8% annual rate is y=0.04.
3
CF refers to cash flow.
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Options:

Put-Call-Spot Parity4 P0 −C 0 + S 0= X (1+r )−T

Black-Scholes formula (Call)5 C 0 =S 0 N (d 1 )− Xe−rt N (d 2 )

Black-Scholes formula (Put) P0 =−S0 N (−d1 )+Xe−rt N (−d 2 )

pC ju + ( 1− p ) C jd
C j=
Simple binomial call (node j)6 r

{∑ }
N
N!
C o= p j ( 1− p ) N− j [ ( u j d N − j ) S−X ] ÷r N
Binomial Formula7 j=m ( N − j) ! j !

Forwards and Futures:

Put-Call-Forward Parity P0 −C 0 +F 0 (1+r )−T = X (1+r )−T

F 0, T =S 0 +SC 0 , T =S0 + ( PC 0 ,T +i 0 , T −D0 , T )

Futures pricing8

Pricing with accrued yields9 F 0, T =S 0 (1+Tr f −d + pc )

Pricing with annualized rates10 F 0, T =S 0 (1+ r f −d + pc )T

(r f −d+ pc )T
Continuous reinvestment F 0, T =S 0 e

( )
1+r Foreign T
F 0 ( Foreign|£ )= S0 ( Foreign|£ )
1+r UK
Foreign Exchange Futures

−T
4
In the continuous case replace (1+r ) by exp (−rT )
d 1 =[ ln( S 0 / X )+T ( r +0 .5 σ ) ] / [ σ √ T ]
2
d =d 1 −σ √ T .
5
and 2
6 r =(1+RFR)1/ N and p=(r−d )/(u−d )
7
m is the smallest number of ups needed for the option to be in the money.
8
S is spot price, SC is cost of carry, PC is storage cost, i is the interest paid for the period, and D is dividend
obtained during the period.
9
r is the yearly interest rate, T is a fraction of a year, d=D/S and pc=PC/S are yields accrued during the
period T.
10
r , d and pc are given as annualized yields.
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