In this post, we are going to walk you through an example of calculating the weighted average cost of capital (WACC) using Excel. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly…
Read More Weighted Average Cost of Capital (WACC)-Business Valuation Calculator in ExcelDebt instruments are an important part of the capital market. In this post, we are going to provide an example of pricing a fixed-rate bond. A fixed rate bond is a long term debt paper that carries a predetermined interest rate. The interest rate is known as coupon rate and interest is payable at specified…
Read More Valuing a Fixed Rate Bond-Derivative Pricing in PythonIn a previous post entitled Credit Risk Management Using Merton Model we provided a brief theoretical description of the Merton structural credit risk model. Note that, The Merton model is an analysis model – named after economist Robert C. Merton – used to assess the credit risk of a company’s debt. Analysts and investors utilize…
Read More Merton Credit Risk Model, a Case StudyAn interest rate swap (IRS) is a financial derivative instrument that involves an exchange of a fixed interest rate for a floating interest rate. More specifically, An interest rate swap’s (IRS’s) effective description is a derivative contract, agreed between two counterparties, which specifies the nature of an exchange of payments benchmarked against an interest rate…
Read More Interest Rate Swap-Derivative Pricing in ExcelIn a previous post, we provided an example of pricing American options using an analytical approximation. Such a pricing model is fast and accurate enough for risk management purposes. However, sometimes more accurate results are required. For this purpose, the binomial (lattice) model can be used. Wikipedia describes the binomial tree model as follows, In…
Read More Valuing an American Option Using Binomial Tree-Derivative Pricing in ExcelR. Merton published a seminal paper [1] that laid the foundation for the development of structural credit risk models. In this post, we’re going to provide an example of how it can be used for managing credit risks. Within the Merton model, equity of a firm is considered a call option on its asset, and…
Read More Credit Risk Management Using Merton ModelIn the previous installment, we presented a concrete example of pricing a European option. In this follow-up post we are going to provide an example of valuing American options. The key difference between American and European options relates to when the options can be exercised: A European option may be exercised only at the expiration…
Read More Valuing an American Option-Derivative Pricing in ExcelAn option is a financial contract that gives you a right, but not an obligation to buy or sell an underlying at a future time and at a pre-determined price. Specifically, … an option is a contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to…
Read More Valuing a European Option-Derivative Pricing in ExcelLast year, in a post entitled Credit Derivatives-Is This Time Different we wrote about credit derivatives and their potential impact on the markets. Since then, they have started attracting more and more attention. For example, Bloomberg recently reported that collateralized loan obligations (CLO), a type of complex credit derivatives, are becoming a favorite financing vehicle…
Read More Are Collateralized Loan Obligations the New Debt Bombs?The overnight index swap (OIS) has come into the spotlight recently, due to the widening of the Libor-OIS spread. For example, the Economist recently reported: WATCHING financial markets can be like watching a horror film. A character walks into the darkness alone. A floorboard creaks. The latest spooky sign is the spread between the three-month…
Read More Overnight Index Swap Discounting