\documentclass[a4paper,11 pt]{article}

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\begin{document}
\author{}
\title{Financial Mathematics}
\maketitle

%----------------- CHAPTER 1---------------------------

\section{The Measurement of Interest}

\subsection{Accumulation function}
\begin{align*}
i_t &= \frac{a(t)-a(t-1)}{a(t-1)}\\
i_t &= \frac{A(t)-A(t-1)}{A(t-1)}\\
A(t) &= k \cdot a(t)
\end{align*}
Under simple interest
\begin{align*}
a(t) &= 1 + it \\
i_t &= \frac{i}{1+i(t-1)}
\end{align*}
Under compound interest
\begin{align*}
a(t) &= (1 + i)^t \\
PV &= \frac{1}{a(t)}
\end{align*}

\subsection{Effective Rate of Discount}

\begin{align*}
d_t & = \frac{a(t)-a(t-1)}{a(t)}\\
i &= \frac{d}{1-d}\\
d &= \frac{i}{1+i}= iv \\
1-d &= v
\end{align*}
\begin{align*}
1+ i &= \left(1+\frac{i^{(m)}}{m} \right)^m \\
i^{(m)} &= m [(1+i)^{1/m}-1]
\end{align*}
\begin{align*}
1-d &= \left(1 - \frac{d^{(m)}}{m} \right)^m \\
d^{(m)} &= m [1-(1-d)^{1/m}]
\end{align*}

\subsection{Force of Interest}
\begin{align*}
\delta_t &= \frac{1}{a(t)} \frac{d}{dt} a(t) \\
&= \frac{1}{A(t)} \frac{d}{dt} A(t) \\
a(t) &= e^{\int_0^t \delta_s ds} \\
\end{align*}
Constant force of interest: $e^{\delta} = 1+ i$

\subsection{Power Series}
\begin{align*}
e^x &= 1 + x +\frac{x^2}{2} +\frac{x^3}{3}+\ldots \\
ln(1+x) &= x - \frac{x^2}{2} + \frac{x^3}{3} - \ldots
\end{align*}

\subsection{Variable Force of Interest}

\begin{align*}
PV &= \frac{a(t_1)}{a(t_2)} = e^{-\int_{t_1}^{t_2} \delta_t dt}\\
\end{align*}

%----------------- CHAPTER 2---------------------------

\section{Solutions of Problems in Interest}
No formulas

\newpage

%----------------- CHAPTER 3---------------------------

\section{Basic Annuities}
\begin{align*}
S &= (first~term) \frac{[1-(ratio)^{N}]}{1- ratio}
\end{align*}

\subsection{Annuities}
\begin{align*}
{a}_{\lcroof{n}} &= \frac{1-v^n}{i}\\
\ddot{a}_{\lcroof{n}} &= \frac{1-v^n}{d}\\
\ddot{a}_{\lcroof{n}} &= (1+i) {a}_{\lcroof{n}} = {a}_{\lcroof{n-1}}+1
\end{align*}

\subsection{Accumulated values}
\begin{align*}
{s}_{\lcroof{n}} &= \frac{(1+i)^n-1}{i}\\
\ddot{s}_{\lcroof{n}} &= \frac{(1+i)^n-1}{d}\\
\ddot{s}_{\lcroof{n}} &= (1+i) {s}_{\lcroof{n}} = {s}_{\lcroof{n+1}}-1
\end{align*}

\subsection{Deferred annuities/perpetuities}
\begin{align*}
_{m|}{a}_{\lcroof{n}} &= v^m{a}_{\lcroof{n}} = {a}_{\lcroof{m+n}}-
{a}_{\lcroof{m}}\\
{a}_{\lcroof{\infty}} &= \frac{1}{i}\\
\ddot{a}_{\lcroof{n}} &= \frac{1}{d}\\
\frac{1}{d}-\frac{1}{i} &= 1
\end{align*}

\subsection{Annuity tricks}
\begin{align*}
\frac{{a}_{\lcroof{2n}}}{{a}_{\lcroof{n}}} &= 1 + v^n\\
\\
{a}_{\lcroof{2n}} &= {a}_{\lcroof{n}} + v^n{a}_{\lcroof{n}}\\
&= (1+v^n){a}_{\lcroof{n}}\\
\\
{a}_{\lcroof{3n}} &= {a}_{\lcroof{n}} + v^n{a}_{\lcroof{n}} + v^{2n}
{a}_{\lcroof{n}}\\
&= (1+v^n+v^{2n}){a}_{\lcroof{n}}
\end{align*}

%----------------- CHAPTER 4---------------------------

\section{More General Annuities}
\subsection{$m$-thly annuities}
\begin{align*}
{a}_{\lcroof{n}}^{(m)} &= \frac{1-v^n}{i^{(m)}} = \frac{i}{i^{(m)}}{a}_{\lcroof{n}}
= {s}_{\lcroof{1}}^{(m)} {a}_{\lcroof{n}}\\
{s}_{\lcroof{n}}^{(m)} &= \frac{(1+i)^n-1}{i^{(m)}} \\
\\
{a}_{\lcroof{\infty}}^{(m)} &= \frac{1}{i^{(m)}}\\
{a}_{\lcroof{\infty}}^{(m)}- \ddot{a}_{\lcroof{\infty}}^{(m)} &= \frac{1}{m}\\
\\
\bar{a}_{\lcroof{n}} &= \frac{1-v^n}{\delta}
\end{align*}

\subsection{Payments in arithmetic progression}

\begin{align*}
A &= P{a}_{\lcroof{n}}+Q\frac{{a}_{\lcroof{n}}-nv^n}{i}\\
&\text{with $P$=first payment, $Q$=common difference}\\
S &= P{s}_{\lcroof{n}}+Q\frac{{s}_{\lcroof{n}}-n}{i}\\
\end{align*}
Increasing annuities
\begin{align*}
\left( I {a}\right)_{\lcroof{n}} &= \frac{\ddot{a}_{\lcroof{n}}-nv^n}{i}\\
\left( I {s}\right)_{\lcroof{n}} &= \frac{\ddot{s}_{\lcroof{n}}-n}{i}\\
&= \frac{\ddot{s}_{\lcroof{n-1}}-(n+1)}{i}
\end{align*}
Decreasing annuities
\begin{align*}
\left( D {a}\right)_{\lcroof{n}} &= \frac{n-{a}_{\lcroof{n}}}{i}\\
\left( D {s}\right)_{\lcroof{n}} &= \frac{n(1+i)^n-{s}_{\lcroof{n}}}{i}\\
\left( I {a}\right)_{\lcroof{n}}+\left( D {a}\right)_{\lcroof{n}} &= (n+1)
{a}_{\lcroof{n}}
\end{align*}
Increasing perpetuities
\begin{align*}
\left( I {a}\right)_{\lcroof{\infty}} &= \frac{1}{id}= \frac{1}{i}+\frac{1}{i^2} \\
\left( I \ddot{a}\right)_{\lcroof{\infty}} &= \frac{1}{d^2}
\end{align*}
Increasing payment up to $n$ and level payments of $n$ afterwards
\begin{align*}
PV(1,2,3,\ldots, n,n,n,\ldots) = \frac{\ddot{a}_{\lcroof{n} }}{i}
\end{align*}

\subsection{May God Have Mercy On Your Soul}

\begin{align*}
\left( I {a}\right)_{\lcroof{n}}^{(m)} &= \frac{\ddot{a}_{\lcroof{n}} - nv^n}
{i^{(m)}}\\
&=PV \left(\frac{1}{m},\ldots,\frac{1}{m},\frac{2}{m},\ldots,\frac{2}{m},\frac{3}
{m},\dots \right)\\
\left( I^{(m)} {a}\right)_{\lcroof{n}}^{(m)} &=\frac{\ddot{a}_{\lcroof{n}}^{(m)} -
nv^n}{i^{(m)}}\\
&=PV \left(\frac{1}{m^2},\frac{2}{m^2},\frac{3}{m^2},\ldots \right)\\
\\
\left( \bar I \bar{a}\right)_{\lcroof{n}} &= \frac{\bar{a}_{\lcroof{n}} - nv^n}
{\delta}
\end{align*}

\subsection{Payments in geometric progression}

\begin{align*}
PV(1,(1+k),(1+k)^2,\ldots) &= \frac{1- \left(\frac{1+k}{1+i} \right)^n}{i-k}\\
&=v\cdot \ddot{a}_{\lcroof{n}~i'}\\
\text{with }1+i'= \frac{1+i}{1+k}&
\end{align*}
Annual payment $f(t)$ (and variable force of interest $\delta_t$)
\begin{align*}
PV &= \int_0^n f(t) v^t dt\\
PV &= \int_0^n f(t) e^{-\int_0^t \delta_r dr}dt
\end{align*}
Palindromic annuity
\begin{align*}
PV(1,2,3,\ldots ,n-1,~n,~n-1,\ldots, 3,2,1) &= {a}_{\lcroof{n}}\cdot
\ddot{a}_{\lcroof{n}}\\
PV(1,2,3,\ldots ,n-1,~n,~n,~n-1,\ldots, 3,2,1) &= {a}_{\lcroof{n+1}}\cdot
\ddot{a}_{\lcroof{n}}
\end{align*}

\newpage
%----------------- CHAPTER 5---------------------------
\section{Yield Rates}
\subsection{Reinvestment rates}
Option 1: Deposit of 1, into fund earning $i$, interest is reinvested at $i'$.
\[ AV = 1 + i \cdot {s}_{\lcroof{n}~i'} \]
Option 2: Yearly deposits of 1, into fund earning $i$, interest reinvested at $i'$.
\[ AV = n + i \cdot \left( I{s}\right)_{\lcroof{n}~i'} \]

\subsection{Interest measurement of a fund}

\[ i= \frac{2I}{A+B-I} \]
with $A=$ amount at beginning, $B=$ amount at end and $I=$ interest earned.

\subsection{Dollar-weighted and time-weighted rates}

E.g. Invest A at start (grows to A+x halfway) and B halfway
\begin{itemize}
\item[-] Dollar-weighted
\[ A(1+i)+ B\left(1+\frac{i}{2} \right)=C \]
\item[-] Time-weighted
\[ \frac{A+x}{A} \cdot \frac{C}{A+x+B}= 1+i \]
\end{itemize}

\subsection{Portfolio methods and investment year methods}

\begin{itemize}
\item[-] Portfolio method:
\end{itemize}
All members of the club, regardless of when they began to invest, get the same
yield rate.
\begin{itemize}
\item[-]Investment year method (IYM):
\end{itemize}
Interest is credited in a way that recognizes when a member joined the club.

\newpage
%----------------- CHAPTER 6---------------------------
\section{Amortization Schedules and Sinking Funds}
\subsection{Amortizing a loan}

\begin{table}[ht]
\centering
\begin{tabular}{c c c c c}% centered columns (5 columns)
\hline
Duration & Payment & Interest Paid & Principal Repaid & Oustanding Principal\\
$t$ & $R$ & $I_t = i B_{t-1}$ & $P_t = R - I_t$ & $B_t= B_{t-1} - T_t$\\[1ex]
% inserts table heading
\hline% inserts single horizontal line
$0$ & & & & ${a}_{\lcroof{n}}$\\[1ex]
$1$ & $1$ & $i{a}_{\lcroof{n}}=1-v^n$ & $v^n$ & ${a}_{\lcroof{n}}-v^n =
{a}_{\lcroof{n-1}}$ \\[1ex]
$2$ & $1$ & $i{a}_{\lcroof{n-1}}=1-v^{n-1}$ & $v^{n-1}$ & ${a}_{\lcroof{n-1}}-
v^{n-1} = {a}_{\lcroof{n-2}}$ \\[1ex]
\vdots & \vdots & \vdots & \vdots & \vdots\\[1ex]
$t$ & $1$ & $i{a}_{\lcroof{n-t+1}}=1-v^{n-t+1}$ & $v^{n-t+1}$ & ${a}_{\lcroof{n-
t+1}}-v^{n-t+1} = {a}_{\lcroof{n-t}}$ \\[1ex]
\vdots & \vdots & \vdots & \vdots & \vdots\\[1ex]
$n$ & $1$ & $i{a}_{\lcroof{1}}=1-v$ & $v$ & ${a}_{\lcroof{1}}-v = 0$ \\[1ex]
\hline%inserts single line
Total & $n$ & $n-{a}_{\lcroof{n}}$ & ${a}_{\lcroof{n}}$ & \\[1ex]
\hline%inserts single line
\end{tabular}
\end{table}

With payments of $\frac{L}{{a}_{\lcroof{n}}}$, the amounts in year $t$ can be

expressed as:
\begin{align*}
I_t &= \frac{L}{{a}_{\lcroof{n}}} \left(1-v^{n-t+1} \right)\\
P_t &= \frac{L}{{a}_{\lcroof{n}}} v^{n-t+1}\\
B_t &= \frac{L}{{a}_{\lcroof{n}}} {a}_{\lcroof{n-t}}
\end{align*}

\subsection{Sinking funds}
\begin{itemize}
\item[-] Interest rate on loan $= i$ \\
Interest rate on sinking fund $= j$
\item[-] Periodic interest payment on loan $= I_t = i \cdot B_0$
\item[-] Periodic sinking fund deposit $SFD= \frac{B_0}{ {s}_{\lcroof{n}~j} }$
\item[-] Total periodic payment $R = i \cdot B_0 + \frac{B_0}
{ {s}_{\lcroof{n}~j} }$
\item[-] Total loan amount $B_0 = (R- i \cdot B_0) \ {s}_{\lcroof{n}~j} $
\item[-] Principal repaid $P_t = (1+i) P_{t-1} + (R_t - R_{t-1} )$
\end{itemize}

\newpage
%----------------- CHAPTER 7---------------------------
\section{Bonds}
\subsection{Price of a Bond}
If $C$ is the redemption value, $F$ the face amount and $r$ the coupon rate, then:
\[ P = Fr~ {a}_{\lcroof{n}~i} + Cv^n \]
If $Fr=Cg$ (usefull when $n$ is unknown),
\[ P = C+ (Fr-Ci) {a}_{\lcroof{n}~i} \]
and
\[ P = \frac{g}{i}(C-Cv^n) + Cv^n \]

\subsection{Premium and discount}

\begin{itemize}
\item[-] If $g>i$: Premium $=P-C$\\
call at earliest date
\item[-] If $g<i$: Discount $=C-P$\\
call at latest date
\end{itemize}
Amortization of premium $P_t = (Fr -Ci)v^{n-t+1}$

\subsection{Price between coupon dates}

\begin{itemize}
\item[-] Price actually paid on date of purchase
\begin{align*}
B_{t+k} &= B_t (1+i)^k \\
&= (B_{t+1}+Fr)v^{1-k}
\end{align*}
\item[-] Quoted price (excl. accrued interest)
\begin{align*}
P &= B_{t+k} - kFr\\
&= B_t (1+i)^k- kFr
\end{align*}
\item[-] Actual/Actual method for government bonds \\
30/360 method for corporate bonds
\item[-] Bond saleman's method
\begin{align*}
&\text{Total interest} = n \cdot Cg + C - P\\
& \text{Average interest} = \frac{n \cdot Cg+C-P}{n}\\
& \text{Average investment} = \frac{1}{2} (P+C)\\
& \text{Approximate yield rate per period } i = \frac{n \cdot Cg+C-P}{\frac{n}{2}
(P+C)}
\end{align*}
\end{itemize}

\newpage
%----------------- CHAPTER 8---------------------------
\section{Financial Instruments}
Price of a share of stock
\[ PV\left(D,D(1+k),D(1+k)^2,\ldots \right)= \frac{D}{i-k} \]
Price of a U.S. T-Bill
\[P= 100\left(1-\frac{n}{360}d\right) \]

%----------------- CHAPTER 9---------------------------

\section{More Advanced Financial Analysis}
\subsection{Inflation, spot and forward rate}
If $i'$ is the real interest rate and $r$ the inflation rate,
\[ 1+i'=\frac{1+i}{1+r}\]
If $s_t$ is the spot rate up to year $t$ and $f_t$ is the forward rate between year
$t$ and $t+1$,
\begin{align*}
(1 + s_{t+1})^{t+1} &= (1 + s_t)^t( 1 + f_t )\\
P &= \sum_t \frac{CF_t}{(1+s_t)^t}
\end{align*}

\subsection{Duration}
\begin{itemize}
\item[-] Macaulay duration
\[ D = \frac{\sum_t t \cdot v^t \cdot CF_t}{ \sum_t v^t \cdot CF_t} \]
\item[-] Modified duration
\begin{align*}
ModD &= -\frac{P'(i)}{P(i)} = \frac{D}{1+i} \\
P\left(i + \Delta i \right) &\approx P(i) - ModD \cdot P \cdot \Delta i
\end{align*}
\item[-] Portfolio duration
\[ D= \frac{P_1 D_1 + P_2 D_2 + P_3 D_3}{P_1+P_2+P_3} \]
\end{itemize}

\subsection{Convexity}
\begin{align*}
C &= \frac{\sum_t t \cdot (t+1) \cdot v^{t+2} \cdot CF_t}{ \sum_t v^t \cdot
CF_t} \\
P\left(i + \Delta i \right) & \approx P(i) - ModD \cdot P \cdot \Delta i +
\frac{1}{2}\cdot C \cdot P \cdot \Delta i^2
\end{align*}

\subsection{Immunization}
Redington immunization
\begin{itemize}
\item[-] $PV(assets) = PV(liabilities)$
\item[-] $P'_A = P'_L$
\item[-] $ P''_A=P''_L$
\end{itemize}
Full immunization
\begin{itemize}
\item[-] $PV(assets) = PV(liabilities)$
\item[-] $P'_A = P'_L$
\item[-] One asset CF before and one after liability CF
\end{itemize}
Interest-sensitive cash flows
\begin{align*}
Effective~ duration &= \frac{P(i-h)-P(i+h)}{2hP(i)}\\
Effective~ convexity &= \frac{P(i+h)+P(i-h)-2P(i)}{h^2P(i)}
\end{align*}

%----------------- CHAPTER 10---------------------------

\section{Introduction to Derivatives}
No formulas

%----------------- CHAPTER 11---------------------------

\section{Forward Contracts}
\[ Forward = S_T - K\]

%----------------- CHAPTER 12---------------------------

\section{Options}
\begin{itemize}
\item[-] Call options
\begin{align*}
Payoff(Call) &= (S_T - K)^+ \\
Profit(Call) &= (S_T - K)^+ -FV\left[ C(K,T) \right]
\end{align*}

\item[-] Put options

\begin{align*}
Payoff(Put) &= (K- S_T)^+ \\
Profit(Put) &= (K- S_T)^+ -FV\left[ P(K,T) \right]
\end{align*}

\item[-] Put-Call Parity

\[ C(K,T)-P(K,T) = S_0e^{-\delta T} - Ke^{-rT}\]
\end{itemize}

\end{document}