The Pricing Tools module includes functions to calculate the present value with or without accrued interest, the theoretical price, the implicit volatility and the implicit yield on general financial contracts and a long range of specific financial securities and instruments.

With just a cash flow and a term structure, it is possible to value the cash flow with the function PresentValue. The internal rate of return of the cash flow can be calculated with ImplicitYield if the term structure is given.

Context

 The present value and the implicit yield can be calculated/generated for the following specific instrument types (objects): Annuity, Bullet, Consol, Serial, Zero, SimpleAnnuity, Float and PassThrough (a mortgage backed obligation). Refer to the modules: Bonds, Floaters and Mortgage Backed Obligations.

The Forwards and the Swaps modules include functions for calculating the present value and the theoretical price for the following specific instrument types (objects): ForwardRateAgreement, MoneyMarketForward, ForeignExchangeForward, InterestRateSwap, currency swaps (PlainCurrencySwap, BasisSwap and FixedSwap) and the swap legs. More complex swaps can also be priced. Refer to the modules: Forwards and Swaps.

The Black Scholes module (Black & Scholes, 1973, option pricing formulas) provides functions for valuing European call and put options on non-dividend paying stock. The implied volatilities are can also be calculated. Refer to the modules: Options and Option Graphics.

The Black 76 module (Black, 1976, option pricing formulas) provides functions for valuing European call and put options on commodities. The exact nature of the underlying commodity varies and may be anything from precious metals, such as gold or silver, to agricultural products. The implied volatilities are supplied as well.

The Cox Ross Rubinstein module (Cox, Ross & Rubinstein, 1979, option pricing formulas) provides functions for valuing European call options (Binomial1), and American call and put options (Binomial2-5).

The Garman Kohlhagen module (Garman & Kohlhagen, 1983, option pricing formulas) provides functions for valuing European call and put options on foreign exchange. The implied volatilities are supplied as well.

The Barone Adesi Whaley module (Barone-Adesi & Whaley, 1987, option pricing formulas) provides functions for valuing American call and put options, and European call and put options, on commodities and commodity-futures contracts. The exact nature of the underlying commodity varies and may be anything from precious metals, such as gold or silver, to financial instruments, such as treasury bonds, foreign currencies or stocks.

The Shastri Tandon module (Shastri & Tandon, 1987, option pricing formulas) provides functions for valuing European call and put options, and American call and put options, on foreign exchange. Using the techniques developed by Geske & Johnson (1984), these securities are priced as a sequence of compound options.

The Zhang and Exotics modules provide functions for pricing many different exotic options including Asian options. Refer to Exotics, Exotic Options 1 and Exotic Options 2.

The Statistical Tools module provides functions for simulating prices and prices paths.

Contents

6.1 Introduction

Summary -- Context -- This Opens the Package

6.2 General Functions/Components

PresentValue -- ImplicitYield
TheoreticalPrice -- ImplicitVolatility
Rebate