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Pricing Techniques
Pricing Techniques
e 2.72
An investor with a short position must pay to the broker any income,such as dividends or in
that have been shorted.The broker will transfer this income to the account of the client from
Net Gain
60000-500-50000 9500
for Purchaser
April Purchase 500 shares of DLF for Rs 120
May Received Dividend
June sell 500 shares for 100 per shares
Net Profit
for seller April Borrow 500 shares and sell them for 120 Rs
May Pay Dividend
June Buy 500 shares for 100
Replace borrowed shares to close short position
Net Profit
come,such as dividends or interest,that normally be received on the securities
the account of the client from whom the securities have been borrowed.
60000
500
50000
-60000
500
50000
-9500
9500
Forward Price for an Investment Asset
Risk Free Interestr is the rate at which money is borrowed or lent when there is n
so that the money is certain to be repaid
Arbitrage Arbitrageur
Trader
One who profits from the differences in price when the same, or extremely similar, security, currency, or commodity
The arbitrageur profits by simultaneously purchasing and selling these securities to take ad
Arbitrageurs are typically very experienced investors since arbitrage opportunities are difficult to find and require re
Arbitrageurs also play an important role in the operation of capital markets, as their efforts
Example
Long forward contract for 3 months
after 3 month
sell 43
An arbitrageur can borrow 40 at the risk free inerest rate of 5% per annume,buy o
At the end of the 3 months,the arbitrageur delivers the shares and receives 43.
40e^0.05*3/12
In Both situations………..
Forward price 43
Action now
Borrow 40 at 5% for 3 months
Buy one share
Enter into forward contract to sell share in 3 month for 43
Action in 3 month
sell share for 43
use 40.5 to repay loan with interest
ond does not pay coupons, or interest payments, to the bondholder while a typical bond does make these interest payments.
ond at maturity.
d at maturity but is also paid coupons over the life of the bond.
d the amount they will receive at maturity.
ace value of the bond.
e and the face value, while the coupon bond gains from the regular distribution of interest.
with a face value of $1,000, which can be purchased for $952.38 or a one-year 5% semi-annual coupon bond trading at its face value of $1
000 at maturity, which is a gain of 5% ($47.62/$952.38).
payments of $25 each during the year for a total of $50, which also represents a 5% gain ($50/$1,000).
eturn, even though the source of the return is different. This is not always true, as each case is different.
43
forward price 39
Action now
short 1 share to realize 40
Invest 40 at 5% for 3 months
Enter into forward contract to buy share in 3 months for 39
Action in 3 month
Buy share for 39
close short position
Receive 40.50 from investment
payments.
$50/$1,000).
se is different.
Lot CMP Bro. STT/other ser.Tax
1-Nov Ril.Fut-DEC,10 100 2000 0.05 0 12.5
100 4 12.5
Total cost
Profit
Actual charges………. in %
security transaction Tax STT On Turnover 0
Transaction charges 0
Brokerage-Trading 0.05
delivery 0.5
200000
116.5
200116.5
202500
117.96
###
2265.54