Covered Combination The covered combination‚ also known as the covered strangle‚ is a limited profit‚ unlimited risk strategy in options trading that involves selling equal number of out-of-the-money calls and puts of the same underlying security‚ strike price and expiration date while owning the underlying stock. Covered Combination Construction Long 100 Shares Sell 1 OTM Call Sell 1 OTM Put Limited Profit Potential Maximum gain for the covered combination is achieved when the underlying
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Interest rate pass-through: the case of Hungary Csilla Horváth‚ Judit Krekó‚ Anna Naszódi Magyar Nemzeti Bank‚ Budapest‚ 1850‚ Szabadság tér 8-9‚ Hungary Telephone: 00-36-1-428-2600‚ Fax: 00-36-1-428-2590 Email: horvathcs@mnb.hu‚ krekoj@mnb.hu‚ naszodia@mnb.hu 1 Interest rate pass-through: the case of Hungary Csilla Horváth‚ Judit Krekó‚ Anna Naszódi Abstract In this paper we analyze the interest rate pass-through in Hungary‚ with the help of ECM and TAR models‚ using both aggregated and bank
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Term Structure of Interest Rate. Candidate number 25909 Section 2 In this section‚ I will introduce some essential components about term structure‚ explain the IS/LM model to reveal the relation between term structure and GDP growth and lastly bring in some empirical evidence to support this relation. 2.1 Some basic terminologies and equations Bond‚ being one of the most popular financial products‚ is one example of firm’s and nation’s lending and borrowing. There are two ways a bond delivers
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CHAPTER 14 INTEREST RATE AND CURRENCY SWAPS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Describe the difference between a swap broker and a swap dealer. Answer: A swap broker arranges a swap between two counterparties for a fee without taking a risk position in the swap. A swap dealer is a market maker of swaps and assumes a risk position in matching opposite sides of a swap and in assuring that each counterparty fulfills its contractual obligation
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Major Determinants of Interest Rates Inflation Inflation is a factor that decisively affects the nature or outcome of interest rates. “Inflation is an increase in prices of goods and services over time”(Financial Institutions‚ Instruments and Markets‚ 2012). Inflation is the natural byproduct of a robust‚ growing economy. No inflation‚ or deflation (the lowering of prices)‚ is actually a much worse economic indicator. Also‚ in a healthy economy‚ wages rise at the same rate as prices. A standard
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67 vol. 2‚ 2012 TARGETING OF KEY INTEREST RATE AS A SOURCE OF CRISIS YANA SOKOLOVA St. Petersburg State University‚ Faculty of Economics‚ Russia Abstract In response to the world economic crisis of 2008 the authorities of many countries have launched policies of interest rate reduction through large-scale asset purchases on the open key rate targeting. The author explains how changes of the federal funds rate increased bank interest rate risk and provoked the recession of 2007-2009
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Goodrich-Rabobank Interest Rate Swap In 1983‚ both B.F. Goodrich and Rabobank needed to execute external financing in order to raise 50 million dollars for ongoing operations. Goodrich wanted to raise the money through debt financing‚ but because their bonds were BBB- rated‚ they would have to pay a steep interest rate for a fixed rate. However‚ the Solomon brothers had an idea. Goodrich could borrow with a floating rate that was tied to LIBOR and then swap interest payments with a Euromarket
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1) A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year. 2) An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment? 3) Which of the following investments has a larger future value? A $100 investment
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What is the rule of 72? Well… here’s the equation: Years to double = 72 / Interest rate DO NOT reread this equation. The rule of 72 is a hard rule to explain. I will do my best to try to explain it. The answer to ‘rule of 72’ gives us a number of years. This number of years tells us how long it takes to double our money. Let’s say you have 100 dollar. The ‘rule of 72’ helps us figure out how long it will take to have 200 dollars. Scenario 1: You have invested your 100 dollars in a 3%
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bond in August for a period of 6 months. Zero-coupon bond of similar quality is currently yielding 4%‚ a cost‚ which the treasurer finds acceptabl(e) The treasurer is of the view that interest rate will rise before the company will issue the debt‚ hence will increase the cost of debt. So to hedge the interest rate risk the treasurer decided to hedge the risk using September Eurodollar futures contract. September 90-day Eurodollar futures contracts are currently trading at 96.25. You are required
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