MFE Study Guide.doc

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1、MFEStudyGuideFall2007–2ndEditionMFEStudyGuide(Fall2007)NotesfromMcDonald’sDerivativeMarketsWrittenbyColbySchaefferWrittenbyColbySchaeffer17/17MFEStudyGuideFall2007–2ndEditionIntroductionThematerialinthisquickstudyguidehasbeendonetothebestofmyknowledge.Sometopicsareon

2、lycoveredbriefly(Delta-HedgingandCaps/Floors)whileothertopicshavebeenomitted(EquityLinkedAnnuitiesandCompoundOptionsw/OneDiscreteDividend).Allexamtipsaremarkedinred!Thisthe1stEditionofmyMFEstudyguide,anditmaybeupdatedinthefuturewithbettercontent.Commentsandquestionsm

3、aybedirectedviaPMtocolby2152ontheActuarialOutpost.2ndEditionNotes:Jravenandfractlhelpedmetweaksomelittleerrorsinthestudyguide.AnentirelyrevampedSpring08EditionwillbeoutbyMarch2008withmoreonBrownianMotion,abetterunderstandingbutlessdetailedlookattheGreeks,aneasierview

4、ofconvexity,andperpetualoptionswillberemoved.Acknowledgements:DayYi,AbrahamWeishus,BillCrossandAOMember“Jraven”WrittenbyColbySchaeffer17/17MFEStudyGuideFall2007–2ndEditionChapter9-ParityandOtherOptionRelationshipsOptionExerciseStyle·American:anytime·European:endofmat

5、urityValueofotherwiseidenticaloptions:European

6、ond:C(K,T)–P(K,T)=B0–PV0,T(Coupons)–e-rTKDifferentAssets:C(St,Qt,T–t)–P(St,Qt,T–t)=PV[Ft,T(S)-Ft,T(Q)]x0:currentexchangeratedenominatedas$/€r€:euro-denominatedinterestrater:AmericanorimpliedinterestrateDIV:streamofdividendspaidonstockEarlyExerciseforAmericanOptions·A

7、merican-stylecalloptionsonanondividend-payingstockshouldneverbeexercisedpriortoexpiration.·Earlyexerciseisnotoptimalif:C(St,K,T–t)>St–K·Whenexercisingcallsjustpriortoadividend,earlyexerciseisnotoptimalatanytimewhere:K-PVt,T(K)>PVt,T(DIV)ArbitrageInequalities(forbothA

8、merican&European)THEREISNOFREELUNCH!K1