Put-Call Parity with Known Dividend

C – P = S – (Div)e–Rt – Xe–Rt

Put-Call Parity with Continuous Dividends

P = C + Xe–Rt – S0e–yt

Black-Scholes-Merton Model
C0 = S0e–ytN(d1) – Xe–RtN(d2)
P0 = Xe–RtN(–d2) – S0e–ytN(–d1)
–
d1 =
√

d2 = d1 – σ√

Delta of a call = e–ytN(d1)

Delta of a put = –e–ytN(–d1)

Eta of a call = e–ytN(d1)(S/C)

Eta of a put = –e–ytN(–d1)(S/P) < 0

Vega = S0e–ytN′(d1) √
N′(x) =
√

N′
Gamma =
S σ√

S0 N' (d1 )σe–yt

Call theta = – + yS0N(d1)e–yt – RXe–RtN(d2)
2√t
S0 N' (d1 )σe–yt
Put theta = – – yS0N(–d1)e–yt + RXe–RtN(–d2)
2√t

Call rho = Xte–RtN(d2)

Put rho = –Xte–RtN(–d2)

Hedging with index options

Portfolio beta × Portfolio value
Number of option contracts =
Option delta × option contract value

Binomial trees
∆
p* =
u = √∆
d= √∆ = 1/ u
–RΔt
f = e [pfu + (1 – p)fd]
Known Dividend
S* = S0 – (Dividend)e–Rt

Continuous dividend yield and binomial trees

∆
p=
u= √∆

d= √∆ = 1/ u

Options on futures

u= √∆

d= √∆ = 1/ u
p=

Money Markets
Days
Price = Face value 1- RBD
Par-Price 360
RBD = ×
Par n
Par-Price 365
RBEY = ×
Price n
365×RBD
RBEY =
360- RBD ×n

Tax-exempt yield
Equivalent taxable yield =
1-Marginal tax rate
RM
Critical tax rate = 1-
R
Accrued interest
30/360
If D1 = 31, change to 30
If D2 = 31 and D1 = 30 or 31, change D2 to 30, otherwise leave D2 at 31
# of days
(Y2 – Y1)×360 + (M2 – M1)×30 + (D2 – D1)
30E/360 – Assumes a 30-day month
If D1 = 31, change to 30
If D2 = 31 Change to 30
# of days
(Y2 – Y1)×360 + (M2 – M1)×30 + (D2 – D1)

# of days between settlement and next coupon payments

w=
# of days in coupon period
 # of days since last coupon
Accrued interest = C
# of days in period

Duration and Convexity

∂P ⎛ ∂R ⎞
= –D ⎜ ⎟
P ⎝1+ R ⎠

∂P ⎛ ∂R ⎞
=–D ⎜⎜ ⎟⎟
P ⎝ 1 + (R/2) ⎠

D=
∑ DCF × t
∑ DCF (price)
1+ y (1 + y) + T(c - y)
D= -
y c[(1 + y) T - 1] + y
1+ y
Duration of a perpetuity is:
y
1+ y T
Duration for a level annuity is: -
y (1 + y) T - 1
⎡ ∂R ⎤
∂P = P ×[(– D) × ⎢ ]
⎣1 + R ⎥⎦
∂P ⎡ ΔR ⎤ 1
= –D ⎢ ⎥ + CX(ΔR)2
P ⎣1 + R ⎦ 2
CX = convexity = Scaling factor [capital loss from capital gain from]
one basis point + one basis point
rise in R drop in R   

D
DM =
1+ y

%Δ in bond price = –DM(ΔR)

V– - V+
DE =
2V0 (∆R)

V0 = initial price
V– = price if YTM decreases by R
V+ = price if YTM increases by R
V– +V+ – 2V0
CXE =
2V0 (∆R)2
Futures
FT = S(1+ R – d)T

Stock hedging with futures

# of contracts =
Bond hedging with futures

# of contracts =
Cross Hedging

h = ρS,F
 

Value at Risk

Portfolio variance for 2 asset portfolio (total risk) = w A2 σ A2 + wB2 σ B2 + 2w A wB Cov( A, B )

Portfolio variance for 2 asset portfolio (total risk) = w A2 σ A2 + w B2 σ B2 + 2 w A w B σ Aσ B ρ A ,B

E(RP,T) = E(RP) × T
σP,T = σP × √

Prob[RP,T ≤ E(Rp) × T – 2.326σP√ ] = 1%  

Prob[RP,T ≤ E(Rp) × T – 1.96σP√ ] = 2.5%
Prob[RP,T ≤ E(Rp) × T – 1.645σP√ ] = 5%