Finance Course Note

Chp1

Aug. 28

  • call option
  • put option
  • strike price/ exercise price
  • maturity/expire
  • long/short
  • long call, short call, long put, short put (call, unlimited gain or loss; put, limited gain or loss; long in option, means buying option, horizontal line must be below x-axis; short in option, means selling option, horizontal line must above x-axis)
  • quotation (quote)
  • market maker
  • bid/ask, bid/offer, buy/sell,买入价/卖出价, (from market maker's or bank's perspective)
  • American option, European option, Bermudan option
  • CDO, collateralized debt obligation. Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.
  • OTC, over-the-counter
  • payoff, not including the cost of contract. different from profit

Sep. 2

  • payoff tax rate diff between diff term of holding stock. e.g. hold stock for more than 1 year, 15% tax rate on payoff; less than 1 year, may 35% tax rate on payoff.
  • cover quote
  • naked option, no other instrument to hedge risk.
  • Forward contract, Future contract. Diff between the two, forward contract OTC, future contract on exchange.
  • interest rate 6% per year, borrow $100 for 3 months, at the end of 3 months, pay $100\times {e}^{0.06\times \frac{3}{12}}$, or $100\times {(1+0.06)}^{\frac{3}{12}}$. Refer to compound interest.
  • combination of some contract(s) or assets(s) equals certain contract. e.g. holding stock + sell call option = sell put option

After class

From news

  • ARM, adjustable-rate mortgage
  • FRM, fixed-rate-mortgage

An adjustable-rate mortgage differs from a fixed-rate mortgage in many ways. Most importantly, with a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.1

  • Amortization, the process of your principal decrease.
  • Negative amortization, the process of the increase of your principal if you pay less the interest you should in a normal mortgage program.

Sep. 18

  • Duration. 1. weighted time of receiving all your money. 2. can measure risk, the higher, the risker.(change in yield makes larger change in price, or you just think longer to receive money)

Sep. 30

  • 8% coupon per year, and paid semiannually, so each period get 4% of the face value.
  • *price of stock after dividend paid

News:
Auction-Rate Securities, use Dutch auction to set the rate.

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