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,…
Read More Are Convertible Bonds Really Attractive?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…
Read More Complex Derivative Linked to Constant Maturity SwapIn 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…
Read More Valuation of European and American Options-Derivative Pricing in PythonIn 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…
Read More Interest Rate Swap-Derivative Pricing in PythonCapital 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…
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 PythonAn 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 ExcelIn 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 Excel