Weather derivatives: Definitions Heating degree days (HDD): For each day this is max(o, 65-4)where a is the average of the highest and lowest temperature in°F Cooling Degree Days(CDD): For each day this is max( o, A-65)
Company a buys default protection from b to protect against default on a reference bond issued by the reference entity, C A makes periodic payments to In the event of a default by c A has the right to sell the reference bond to B for its face value
Valuation of Swaps The standard approach is to assume that forward rates will be realized This works for plain vanilla interest rate and plain vanilla currency swaps, but does not necessarily work for non- standard swaps
Term Structure models Blacks model is concerned with describing the probability distribution of a single variable at a single point in time a term structure model describes the evolution of the whole yield curve
Derivatives Dependent on a single Underlying Variable Consider a variable, 0, (not necessarily the price of a traded security) that follows the process d e S Imagine two derivative s dependent on e with prices f, and f2. Suppose
Binary options Nonstandard American Lookback options options Shout options Forward start options Asian options Compound options Options to exchange Chooser options one asset for another Barrier options Options involving
Standard approach to Estimating Volatility Define on as the volatility per day between day n-1 and day n, as estimated at end of day Define S: as the value of market variable at end of day i
European Options on Stocks 13.2 Providing a dividend yield We get the same probability distribution for the stock price at time T in each of the following cases 1. The stock starts at price so and provides a dividend yield =q 2. The stock starts at price Soe q l and provides no income
