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Analysis of Derivatives for the CFA Program by Don M. Chance

By Don M. Chance

Research of Derivatives for the CFA® software introduces scholars and practitioners to a pragmatic danger administration method of derivatives. The textbook captures present perform and displays what the overall funding practitioner must find out about derivatives. It doesn't easily carry an evidence of assorted derivatives tools and positions yet offers motivation for each derivatives place via explaining what the chief desires to accomplish sooner than addressing the main points of the location.

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We borrow $50 at 4 percent interest by issuing a risk-free bond, use the money to buy one share of stock AXE, and simultaneously enter into a forward contract to sell this share at a price of $54 one period later. The stock will then move to either $75 or $40 in l9 One might reasonably wonder if finding a consumer article selling in Wal-Mart at a lower price than in Target is not a violation of the law of one price. It certainly is, but we make no claim that the market for consumer products is efficient.

19 Now suppose we face the situation illustrated in Exhibit 1-5 on page 18. In Exhibit 1-5A, observe that we have one stock, AXE Electronics, which today is worth $50 and which, one period later, will be worth either $75 or $40. We shall denote these prices as AXE = 50, AXE+ = 75, and AXE- = 40. Another stock, BYF Technology, is today worth $38 and one period later will be worth $60 or $32. Thus, BYF = 38, BYF+ = 60, and BYF- = 32. Let us assume the risk-free borrowing and lending rate is 4 percent.

A Arbitrage, or the absence of it, is the basis for pricing most derivative contracts. Consequently, it is relatively unusual, although certainly not impossible, for derivative markets to be used to generate arbitrage profits. 11. B One reason derivative markets have flourished is that they have relatively low transaction costs. For example, buying a risk-free Treasury security and a futures contract on the S&P 500 Index to replicate payoffs to the index is cheaper than buying the 500 stocks in the index in their proper proportions to get the same payoff.

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