Forward rate agreement

The buyer of a forward rate agreement (FRA) locks in (secures) an interest rate. He protects himself against rising rates but, on the other side, also doesn’t profit from falling ones. The seller of an FRA is secured against falling interest rates as he invests the money at the locked-in interest rate.

In the money/ At the money/ Out of the money

If a call option is in the money, its strike price is lower than the underlying price.  Formula: Underlying – Strike Price = Positive If a put option is in the money, it means that its strike price is higher than the price of the underlying.  Formula: Strike Price – Underlying = Positive If an option is at the money, its strike price and underlying […]

Cap, Floor and Collar

If you are worried about interest rate fluctuations (eg. you want to buy a bond or take on a credit) you might use one of the following instruments: Cap If you are worried about rising interest rates (eg. you want to buy a bond) then a Cap might be the right thing for you. How does it work: If the […]

How the european central bank increases or decreases the money supply of the economy?

The European central bank (ECB) has 3 main ways to increase/decrease the money supply and : 1) Open market operations The main instrument for the ECB for controlling the liquidity on the market is “open market operations”. Their aim is to achieve a balance between liquidity demand and liquidity supply at a specified interest rate. Open market operations are usually […]

Discrete (arithmetic) mean return vs geometrical mean return vs log return

“Discrete” suggests one receives the interest amount at the end of a period. Discrete net and gross returns for one period Discrete net return for several periods: As you can see below, you need to combine discrete net returns by multiplication. Gross return for several periods (discrete) However, this doesn’t seem right in some cases: For example, in the case […]

There are 2 main sections of statistics

1) Descriptive statisticsDescribes, summarizes, and presents data (with graphs, tables, key figures). You only describe the data you actually have. Example: You graph the maximum speed for a set of 4 cars. 2) Analytical / inferential statisticsAnalyzes data samples and tries to make statements about a larger group (population) from which the data samples were chosen. For example, if you […]

Index funds

Index funds hold ( a big part of) the investment products represented in an index. They often charge low fees and are ideal for investors who want to go with the market. However, due to an index fund’s costs (e.g., management costs), its profitability always lacks behind the index it follows.

Mean / Median / Mode

Modeis like the most often occurring value in your set of datai.e. Dataset: 1, 2, 3, 3, 4 -> Mode is 3 There can also be multimodal datasets. Eg. 1,2,2,3,3. Here the mode is 2 and 3. Medianis the value in the middle of your data set. (values have to be ranked from low to high)i.e. Dataset: 1, 2, 3, […]