Due to heavy fog around Zhuhai, the ferry to and from Hong Kong was cancelled today. We will have a make-up class for this lecture. In the mean time, I have prepared some online material that you can review prior to our make-up class. This is a summary of lecture 8 which we will discuss again in the make-up class. I have changed the format of the files this time. Previously, I have embedded the windows media file within a flash files for securites reasons; however, the windows medai control is lost. For this time, I have left the files as windows media so that you can download directly from the web and listen to the wma directly from your computer.

• Part 1
• Part 2
• Part 3
• Part 4

• the use of Treasuries and LIBOR as benchmark for risk free interest rate to use,
• the conversion of interest rate to continuous compounding and back,
• the use of zero rates to discount and value a bond,
• the use of bootstrapping method (with continuous compounding) to find a spot zero rate curve,
• forward rates and how they are derived from the set the spot zero rates,
• forward rate agreements (FRAs) and how to determine their profit and loss positions, and
• the thories of term structure of interest rates.

• the arbitrage process,
• the determination of forward / futures value with no income or cost,
• the determination of forward / futures value with discrete dollar amount income,
• the determination of forward / futrues value with cotinuous yield,
• valuation of the forward / futures contact after the initial agreement date.

• calculation of forward / futures value with no income and with income,
• the determination of forward / futures value for a stock index with a continuous dividend yield,
• the determination of forward / futures value for currencies,
• the determination of forward / futures value for commodities,
• the concept of cost of carry,
• the concept of contango and backwardation,
• option payoff diagram, and
• valuation of FRA after issuance.

• day count convention for bonds,
• dirty vs clean prices,
• calculation of futures price for bond including accrual interest and conversion factor adjustment,
• Eurodollar futures, and
• duration hedging.

• the basics of options,
• types and terminologies of options,
• margins calculation for options, and
• the payoff of a strangle.

• two long practice questions using the covered call and protective put strategies,
• including calculation of moneyness, amount of moneyness, intrinsic value, time value, and margin requirements,
• the six factors (time, volatility, price, strike, risk free rate, dividend) that affect option value and how,
• put call parity and rationale behind it, and
• an overview of the other option strategies like bull spread, bear spread, straddle, and strangle.
• The notes from class can be found under Lecture 8 and Lecture 9 in the Course Outline and Lecture Notes section.

• the six factors that affect option value,
• the upper and lower bound of option prices,
• put call parity,
• option strategies using an underlying asset and an option including covered call and protective put,
• option strategies using same option types including bull and bear spreads, butterfly, and calendar spreads,
• option strategies using different option types including straddle. strangle, strips and straps, and
• an overview of option valuation using binomial trees.

• binomial tree to value call and put European and American options,
• calculation of u, d, p, and 1-p,
• use u and d to estimate the price path and ending value of the underlying asset at option maturity,
• determine the value of the option at maturity (or at each node if American) and find the value of the option today.

• European options valuation using the Black-Scholes formula,
• using Black-Scholes to calculate the price of European options with dividends,
• using Black-Scholes to estimate the price of American options with dividends,
• revisited the concept of put-call parity,
• introduction to the Greeks of option valuation - delta, gamma, vega, theta, and rho,
• interest rate swaps, and
• currency swaps.

• a review of the mid-term test, and
• a review of the final exam review questions.

[Download: Part 1, Part 2, Part 3, Part 4 - these are short clips on lecture 8, we will discuss in more details during the make up class]

Dr. Thomas Wu

The course consists of class lectures and tutorials. Students should attend all lectures and tutorials. Attendence will be taken and there is a required minimum attendence level. Students should have read and be familiar with assigned readings and related materials before class. Students should also work through practice questions and be familiar with the use of a financial calculator.

For this course, a general purpose non-financial calcuator can be used. Students who do not have ready access to a financial calculator should be able to perform all the required analysis and calculations using a general purpose non-financial calculator for the tutorials, assignments, mid-term test, and final examination.

You can also use a non-programmable financial calculator for the tutorials, assignment, mid-term test, and final examination. Common financial calculators are HP12c and TI BAII PLUS. User manual in simplified chinese and a tutorial for the HP12c can be found here and a simple tutorial for the HP12c can be found here. User manual for the TI BAII can be found here.

Regardless of the types of calculators used for this course, students are responsible for their own equipment and they cannot be shared in a quiz, test, or examination situation. As a result, students MUST bring their own calculators to each class. In addition, each student must be proficient in the use of their own equipment.

Electronic translators CANNOT be used for quiz, test, or examination situations, but they can be used during class (only with volume off) and your own study time.

There are specific terms that apply to accounting and finance, and there are various online sources that can help students understand these terms.

Download and print for reference:

• Hong Kong Exchange glossary of terms (English to Chinese)
• 88translation.com finance dictionary (Chinese to English, English to Chinese)

Online finance dictionaries:

• Reuters Chinese to English and English to Chinese finance dictionary
• Goldman Sachs English to Chinese finance dictionary
• Goldman Sachs Chinese to English finance dictionary
• Morgan Stanley English to Chinese finance dictionary

Other unverified sources of financial references:

• Finance Street - a finance related site prepared by the government
• Financial glossary of terms
• List of dictionaries