# DERIVATIVES

## Valuing a Convertible Bond-Derivative Pricing in Python

In a previous post, we presented a theoretical framework for pricing convertible bonds and preferred shares.  We also provided an example of pricing a convertible bond in Excel. In this installment, we present an example of pricing a convertible bond in Python. Recall that a convertible bond (or preferred share) is a hybrid security, part…

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## How Negative Interest Rates Affect Derivative Pricing Models

As negative interest rates started popping up around the world, quantitative analysts and traders have been asking a mundane but fundamental question: How to price trillions of dollars of financial instruments when their complex pricing models don’t work with negative numbers? Intuitively, we would say that negative interest rates will affect the prices of interest-rate…

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## Are Convertible Bonds Really Attractive?

Investors in South Korea have lost money in a complex derivative linked to constant maturity swap.  In search for higher yields, they are also putting money into another complex financial instrument, convertible bonds. Bloomberg recently reported, Sales of convertibles, which pay low coupons and let investors convert into stock if the issuer’s shares rise enough,…

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## Complex Derivative Linked to Constant Maturity Swap

Yonhap recently reported that South Korea’s investors appear to have lost money by investing in complex derivative products. The Financial Supervisory Service (FSS) said 3,654 individual investors and 188 businesses were found to have bought 822.4 billion won (US\$677.8 million) worth of so-called “derivatives-linked fund” options sold by banks as of Aug. 7. Such derivative…

## Valuation of European and American Options-Derivative Pricing in Python

In previous posts, we provided examples of pricing European and American options in Excel. For pricing the European option, we utilized the Black-Scholes formula, and for pricing the American option we utilized the binomial approach. In this post, we are going to implement these methods in Python. Recall that, In finance, the binomial options pricing…

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## Interest Rate Swap-Derivative Pricing in Python

In a previous post, we presented an example of Interest Rate Swap Pricing in Excel. In this post, we are going to provide an example of interest rate swap pricing in Python. We are going to use the USD Libor swap curve as at December 31 2018. Picture below shows the swap curve. Recall that…

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## Weighted Average Cost of Capital (WACC)-Business Valuation Calculator in Excel

Capital structure is an important determinant factor of a company’s credit risks. 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…

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## Valuing a Fixed Rate Bond-Derivative Pricing in Python

Debt 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…

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## Interest Rate Swap-Derivative Pricing in Excel

An 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…

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## Valuing an American Option Using Binomial Tree-Derivative Pricing in Excel

In 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…

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