Machine Learning in Finance

  The currency rate is always stated as   quoting prices in terms of units of the domestic currency per unit of foreign currency   Recall that in pricing equity forwards, we always reduced the stock price by the present value of the dividends and then compounded the resulting value to the expi- ration date. We can view currencies in the same way. The stock makes cash payments that happen to be called dividends; the currency makes cash payments that happen to be called interest. Although the time pattern of how a stock pays dividends is quite different from the time pattern of how interest accrues, the general idea is the same. After reducing the spot price or rate by any cash flows over the life of the contract, the resulting value is then compounded at the risk-free rate to the expiration day. In international financial markets, however, this formula has acquired its own name: interest rate parity (sometimes called covered interest rate parity). It expresses the equi...

Forward Rate Agreements: FRAs are used to lock in interest rates for a future date. They are based on the principle that there can be no arbitrage profits between investing for two different horizons. In an increasing interest rate environment, the final calculated value will be higher than each of the horizons used to perform the calculations. FRA Conventions:   A 3 x 9 FRA means an FRA contract that will go live in 3 months, and the contract will be for a duration of (9-3) = 6 months FRA valuation: The FRA can be valued at any point in time, as the difference between the agreed rate and the current rate, multiplied by the nominal value, and discounted to the present