An option is a contract that provides its holder with the right to buy or sell an underlying asset or security. It involves a specific price before or on a predetermined date. However, it does not obligate them to do so. There are several option styles, which represent the class …

A swap is a financial derivative that allows two parties to exchange their financial instruments or cash flows. These are highly crucial for investors, particularly for hedging. There are various types of swaps that investors can acquire. One of these includes total return swaps. Before understanding what these are, it …

Convertible bonds are complex securities that are part debt, part equity. The main feature of a convertible bond is the conversion that allows the bondholder to convert debt to equity. In addition, there can be many other “exotic” features such as callable, puttable, forced conversion, soft call, contingent conversion, etc. …

We previously discussed implied dividend yield and how to extract it from traded financial instruments. Given that dividend is considered a cash payment the shareholder receives when holding a stock, naturally one would think that dividend yield can only be zero or positive. We recently, however,  worked with a client …

Black-Scholes-Merton (BSM) is a celebrated option pricing model that is used frequently in the financial industry . The model was developed initially for equity options but then has been extended to many asset classes. It is so frequently used, to the point that the practitioners almost do not pay attention …

Investors can use various hedging techniques to mitigate the risks associated with their equity and debt instruments. These techniques include the use of options, swaps, forwards, futures, etc. Usually, these use derivates, which are financial securities that get their value from an underlying asset or group of assets. One method …

Derivatives are financial products whose values are determined by the current price of the underlying asset or portfolio. Weather derivatives are a particular class of financial instruments that individuals or companies can use in support of risk management in relation to unpredictable or adverse weather conditions. While some may see …

Dividend yield is an input into the option valuation model that often receives little attention from practitioners. This is probably because the majority of companies do not pay dividends. And for those that pay, an inaccuracy in the estimation of the dividend yield often has a small impact on the …

Inflation is a concept used in economics and finance. It refers to the decline in the purchasing power of a currency over a specific period. Usually, inflation can have positive and negative effects in several fields. For investors that have a fixed income source, such as bonds, inflation can be …

The Binomial tree is a standard method for pricing American style options. Recall that, The Binomial options pricing model approach has been widely used since it is able to handle a variety of conditions for which other models cannot easily be applied. This is largely because the BOPM is based …