Options, Futures, and Other Derivatives 6th

Transcript:Options, Futures, and Other Derivatives 6th:
Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.1 Interest Rates Chapter 4 Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.2 Types of Rates Interest rate defines the amount of money a borrower promises to pay the lender. Depends on the credit risk. Treasury rates: rates an investor earn on Treasury bills and Treasury bonds LIBOR rates: the rate at which a bank is prepared to make a large wholesale deposit with other banks (AA credit rating is needed) Repo rates: The difference between the price at which securities are sold and the (higher) price at which they are repurchased Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.3 Measuring Interest Rates The compounding frequency used for an interest rate is the unit of measurement The difference between quarterly and annual compounding is analogous to the difference between miles and kilometers Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.4 Continuous Compounding (Page 79) In the limit as we compound more and more frequently we obtain continuously compounded interest rates $100 grows to $100(1+R)T when invested at an annually compounded rate R for time T $100 grows to $100eRT when invested at a continuously compounded rate R for time T $100 received at time T discounts to $100e-RT at time zero when the continuously compounded discount rate is R Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.5 Conversion Formulas (Page 79) Define Rc : continuously compounded rate Rm: same rate with compounding m times per year Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.6 Zero Rates A zero rate (or spot rate), for maturity T is the rate of interest earned on an investment that provides a payoff only at time T Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.7 Example (Table 4.2, page 81) Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.8 Bond Pricing To calculate the cash price of a bond we discount each cash flow at the appropriate zero rate In our example, the theoretical price of a two-year bond providing a 6% coupon semiannually is Options, Futures, and Other Derivatives 6th Edition, Copyright © John C. Hull 2005 4.9 Bond Yield