The value of a country's needs and its currency is the amount of goods and services by a unit of currency in the country can buy decision, namely the decision by its purchasing power, and therefore the exchange rate between two currencies can be expressed as the ratio of the purchasing power of the two currencies. However, the size of the purchasing power is reflected by the price levels. Based on this relationship, domestic inflation will mean their currencies depreciate relative to foreign currencies. Relative PPP definitely makes up for some deficiencies in terms of purchasing power parity. Its main points can be simply stated as: currency exchange rate between the two countries will be based on the difference between the two countries the rate of inflation and adjust accordingly.
The figure below is an example of cash flows of a callable bond: Figure 1: cash flows of a callable bond 2.2. Call
2.2 Credit Default Swap pricing formula. The pricing formula of Credit Default Swap incorporates two components: the fixed leg, which refers to the periodic payment the protection buyer has to honor, and the default leg which refers to the payment of the protection seller in case of a default event. We define N as the notional amount of the CDS contract, D(t) the risk free discount factor at time t, R the recovery rate and Delta t the time interval between the payments. The present value of the fixed leg and is defined as: PV_{fixed}=Ssum_{i=1}^{n}ND(t_{i})P_{survival}(t_{i})Delta t_{i} The default leg is defined as: PV_{default}=(1-R)sum_{i=1}^{n}ND(t_{i})(P_{surv}(t_{i-1})-P_{surv}(t_{i})) The price of the CDS contract at the time t=0
CAPITAL MARKET THEORY The Concept of Capital Market Theory is that it tries to describe and evaluate the advancement of capital and likewise financial market over a certain period of time. The Capital Market Theory in general tries to clearly define and foresee the development and advancement of capital. It is also known to be a common term that is used for the study of securities. In terms of the relationship between rate of returns seeked by all investors and likewise the inheritance of risk that comes along. The main purpose of this capital market theory model is that seeks to “price assets” but more popularly “shares” among investors.
(1) Primary ways companies raise common equity: A company can raise common equity in following two ways: i. By retaining earnings and ii. By issuing new common stock. d. (2) Cost associated with reinvested earnings or not: The companies may either pay out the earnings in the form of dividends or else retain earnings for reinvestment in business. If part of the earnings is retained, opportunity cost is incurred, stockholders may had received those earnings as dividends and then invested that money in stocks, bonds, real estate and others.
Notably, results with a positive skewness indicate a higher probability of returns being lower than the mean but there is a limit to the amount of losses and vice versa. Hedge funds with a positive kurtosis are characterized by a distribution indicating a higher probability around the mean, representing consistency in the hedge fund’s performance over the years. 5.3 Maximum Drawdown and Calmar Ratio Maximum Drawdown measures the most recent percentage decline from the fund’s highest net asset value (peak) to its immediate lowest net asset value (trough). This metric is used to identify an investment’s financial risk. A variation of the Maximum Drawdown is the Calmar Ratio, which is derived by dividing the compounded returns of the fund over the peak to trough drawdown in the similar period.
Option in finance has a meaning of a contract giving the buyer a right to buy the underlying asset or to sell it at a specified strike price (can be set by looking at market price) and date; also depending on which option they bought. Option also has some factors, which are underlying price, strike price, expected volatility, time until expiration, interest rate and dividends.
However, this theory cannot take into account the fluctuations of forex rate. Hence, another theory called overshooting model by late Rudiger Dornbuschis was proposed. This theory explains that a currency appreciates more in the short-run than in the long-run. This can take into account the fluctuations of the forex rate. However, predicting the short-run is complicated and this is viewed by economists as a random walk.
Macroeconomics is concerned primarily with the forecasting of national income, through the analysis of major economic factors that show predictable patterns and trends, and of their influence on one another. These factors include level of employment/unemployment, gross national product (GNP), balance of payments position, and prices (deflation or inflation). Macroeconomics also covers role of fiscal and monetary policies, economic growth, and determination of consumption and investment levels. The function of the economy or the performance of the economy is reflected through the Trade Coclé or Business cycle. The trades cycle or business cycle are cyclical fluctuations of an economy.
Banks accept deposit and make loans and derive a profit from the difference in the interest rates paid and charged, respectively. Depositors may be either individual or institutions. These deposits may be current, saving or fixed and the tenure depends upon mutual agreements