Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
An Example
An Example
An Example
10
$8540.72
Compound Interest
Compound Interest
5.5 / 4 1.375%
Compound Interest
0.055
F1 5000 1
$5280.72
4
F10 5000 1
410
$8633.85
r
F P 1
n
nt
Yield
Yield
Such a rate is called the effective annual
yield, annual percentage yield, or simply
yield.
In our previous example when we
compounded quarterly, after one year we
had:
0.055
F1 5000 1
41
$5280.72
Yield
r
P 1 P
n
r
n
y
1 1
P
n
More on Yield
r
y 1
n
r
y 1 1
n
y 11/ n 1 r
n
y 11/ n 1 r
n
1/ n
n y 1 1 r
1
n
Continuous Compounding
r
P 1
n
nt
1
P 1
m
mrt
1
1
m
rt
1
1
m
2.71828182845905 e
Continuous Compounding
F Pe
On
rt
Pe P
r
y
e 1
P
r
r ln y 1
Present Values
r
P F 1
n
P F e r t
nt
Ratios
F Pe rt
R
e rt
P
P
Example Ratios
Example Ratios
The Project
The Project
Compound interest can help us with option pricing
in a second way. Suppose that we know a
future value F for our 20 week option at the end
of the 20 weeks. We suppose that money will
earn at the risk-free annual interest rate or 4%
compounded continuously. This can be used to
find the present value, P, of the option.
P F e
P F e
rt
0.04
20
52
Preliminary Reports
You will deliver your preliminary report on Monday March 28th, 2005.
Download your teams historical data today and start looking at the
behavior of your companies particular stock.
For the report you want to determine what a reason able price will
be for investors considering buying an option for your teams
particular company and an explanation as to how you determined
that.
The Chicago Board of Options Exchange is a good resource for
understanding how options are priced.
I will need two hard copies of your powerpoint slides.
Because this is a new project, you will need to draft new team
contracts. Those will be collected in class on Wednesday, March
30th, 2005.