ratios: settli1 - Finsia [PDF]

RATIOS: SETTLI1'. HOW TO PUT A PRICE ON OUTPERFORMANCE. Share price ratios, developed by Australian Stock Exchange. Deri

0 downloads 4 Views 2MB Size

Recommend Stories


[PDF] Business Ratios and Formulas
The best time to plant a tree was 20 years ago. The second best time is now. Chinese Proverb

Fe2+ ratios
We may have all come on different ships, but we're in the same boat now. M.L.King

s ratios
In the end only three things matter: how much you loved, how gently you lived, and how gracefully you

16O ratios
How wonderful it is that nobody need wait a single moment before starting to improve the world. Anne

Exposure Ratios
I want to sing like the birds sing, not worrying about who hears or what they think. Rumi

MIC Ratios
Goodbyes are only for those who love with their eyes. Because for those who love with heart and soul

H2O Ratios
Happiness doesn't result from what we get, but from what we give. Ben Carson

4 Ratios
What we think, what we become. Buddha

Digit Ratios
You have survived, EVERY SINGLE bad day so far. Anonymous

Ratios, Proportions & Proportional Reasoning
Seek knowledge from cradle to the grave. Prophet Muhammad (Peace be upon him)

Idea Transcript


RATIOS: SETTLI1' HOW TO PUT A PRICE ON OUTPERFORMANCE hare price ratios, developed by ASX Derivatives and others, are simple contracts that will pay off on the relative performance of a stock price to the All-Ordinaries index (AOI). As an illustration, a BHP ratio price will be 1,000 times the BHP share price (in cents) divided by the AOI, and the contract will be $10.00 times the ratio price. If the BHP share price is $18.00 and the AOI is 2,000.0, then the ratio price is 900 and the contract will be $9,000.00. These contracts are discussed in depth in a report by Hathaway (1994) and only the basic essentials are discussed here in order to derive a pricing equation. The exact pricing equation derived here updates the heuristic pricing formulas presented in that report. A ratio is a contract that (ignoring contract multipliers): • pays off on the difference between the opening ratio of a stock price to an index price, S0 /I 0, and the closing ratio value, 5.r/IT; • is a smooth function of time, stock price and index price; and • is a derivative security over two traded securities, the stock and the index (which is equivalent to a portfolio of stocks). In summary, a ratio contract entered into at time t = 0 is described by a function R(S,I,t) and the maturity payoff function:

S

Share price ratios, developed by Australian Stock Exchange Derivatives, are relative performance contracts devised to take advantage of differences between individual stock prices and the All-Ordinaries index. NEVILLE HATHAWAY presents a pricing formula for this new derivative product.

R(S,l,t~T) ~[fT]-[;;J Neville Hathaway is associate professor of finance In the Melbourne Business School, University of Melbourne.

II

Jul - Sep

1996 - JASSA

ing any derivative contract (see, for example, Hull 1993). Suppose the stock price and the index both follow random walks, with some correlation between the stock and the index.

dS = µ 8 dt +(J' 8 dZ 1

s

dI = µ 1dt +

Smile Life

When life gives you a hundred reasons to cry, show life that you have a thousand reasons to smile

Get in touch

© Copyright 2015 - 2024 PDFFOX.COM - All rights reserved.