Derivative instrument and Periodic discount rate: Difference between pages

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''Risk management - hedging''.
__NOTOC__
A cost of borrowing - or rate of return - expressed as:


A derivative instrument or contract is one whose value and other characteristics are derived from those of another asset or instrument (sometimes known as the Underlying Asset).
*The excess of the amount at the end over the amount at the start
*Divided by the amount at the end


Derivative instruments are widely used by non-financial corporates for hedging purposes.


==Example 1==
GBP 1 million is borrowed.


<span style="color:#4B0082">'''Example'''</span>
GBP 1.03 million is repayable at the end of the period.


A share option is a type of derivative contract, allowing the holder to buy shares at a certain predetermined strike price.


The value of the share option derives from the current price of the related underlying share relative to the option strike price.
The periodic discount rate (d) is:


d = (End amount - start amount) / End amount


== See also ==
= (1.03 - 1) / 1.03
* [[CCR]]
* [[Collateral]]
* [[Commodity risk]]
* [[CP]]
* [[Credit support annex]]
* [[Embedded derivative]]
* [[ETD]]
* [[FC]]
* [[Fixing instrument]]
* [[FVTOCI]]
* [[FVTPL]]
* [[Hedge fund]]
* [[Hedging]]
* [[IR]]
* [[ISDA Master Agreement]]
* [[Margining]]
* [[Mark to market]]
* [[Maturity]]
* [[Notional principal]]
* [[Option]]
* [[Outright]]
* [[Potential Future Exposure]]
* [[Replacement cost]]
* [[Risk management]]
* [[Strike price]]
* [[Tracker fund]]
* [[Transfer]]
* [[Underlying]]
* [[Underlying asset]]
* [[Underlying price]]
* [[XVA]]


= 0.029126


===Other links===
= '''2.9126%'''
*[http://www.treasurers.org/node/8599  Masterclass: Derivatives, ''Sarah Boyce,'' The Treasurer]


[[Category:Risk_frameworks]]
 
==Example 2==
GBP 0.97 million is borrowed or invested
 
GBP 1.00 million is repayable at the end of the period.
 
 
The periodic discount rate (d) is:
 
(End amount - start amount) / End amount
 
= (1.00 - 0.97) /  1.00
 
= 0.030000
 
= '''3.0000%'''
 
 
==Example 3==
GBP  0.97 million is borrowed.
 
The periodic discount rate is 3.0000%.
 
Calculate the amount repayable at the end of the period.
 
===Solution===
The periodic discount rate (d) is defined as:
 
d = (End amount - start amount) / End amount
 
d = 1 - (Start amount / End amount)
 
 
''Rearranging this relationship:''
 
(Start amount / End amount) = 1 - d
 
Start amount = End amount x (1 - d)
 
Start amount / (1 - d) = End amount
 
End amount = Start amount / (1 - d)
 
 
''Substituting the given information into this relationship:''
 
End amount = GBP 0.97m / (1 - 0.030000)
 
= GBP 0.97m / 0.97
 
= '''GBP 1.00m'''
 
 
==Example 4==
An investment will pay out a single amount of GBP 1.00m at its final maturity after one period.
 
The periodic discount rate is 3.0000%.
 
Calculate the amount invested at the start of the period.
 
===Solution===
As before, the periodic discount rate (d) is defined as:
 
d = (End amount - start amount) / End amount
 
d = 1 - (Start amount / End amount)
 
 
''Rearranging this relationship:''
 
(Start amount / End amount) = 1 - d
 
Start amount = End amount x (1 - d)
 
 
''Substitute the given data into this relationship:''
 
Start amount = GBP 1.00m x (1 - 0.030000)
 
= '''GBP 0.97m'''
 
 
 
==See also==
 
*[[Effective annual rate]]
*[[Discount rate]]
*[[Nominal annual rate]]
*[[Periodic yield]]
*[[Yield]]

Revision as of 15:04, 26 October 2015

A cost of borrowing - or rate of return - expressed as:

  • The excess of the amount at the end over the amount at the start
  • Divided by the amount at the end


Example 1

GBP 1 million is borrowed.

GBP 1.03 million is repayable at the end of the period.


The periodic discount rate (d) is:

d = (End amount - start amount) / End amount

= (1.03 - 1) / 1.03

= 0.029126

= 2.9126%


Example 2

GBP 0.97 million is borrowed or invested

GBP 1.00 million is repayable at the end of the period.


The periodic discount rate (d) is:

(End amount - start amount) / End amount

= (1.00 - 0.97) / 1.00

= 0.030000

= 3.0000%


Example 3

GBP 0.97 million is borrowed.

The periodic discount rate is 3.0000%.

Calculate the amount repayable at the end of the period.

Solution

The periodic discount rate (d) is defined as:

d = (End amount - start amount) / End amount

d = 1 - (Start amount / End amount)


Rearranging this relationship:

(Start amount / End amount) = 1 - d

Start amount = End amount x (1 - d)

Start amount / (1 - d) = End amount

End amount = Start amount / (1 - d)


Substituting the given information into this relationship:

End amount = GBP 0.97m / (1 - 0.030000)

= GBP 0.97m / 0.97

= GBP 1.00m


Example 4

An investment will pay out a single amount of GBP 1.00m at its final maturity after one period.

The periodic discount rate is 3.0000%.

Calculate the amount invested at the start of the period.

Solution

As before, the periodic discount rate (d) is defined as:

d = (End amount - start amount) / End amount

d = 1 - (Start amount / End amount)


Rearranging this relationship:

(Start amount / End amount) = 1 - d

Start amount = End amount x (1 - d)


Substitute the given data into this relationship:

Start amount = GBP 1.00m x (1 - 0.030000)

= GBP 0.97m


See also