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Finance Cheat Sheet- Formulae and Terminology £3.39
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  3. London School Of Economics (LSE)
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  5. Introduction to Finance (FN1202)

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Finance Cheat Sheet- Formulae and Terminology
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This document has all the relevant formulae for FN1202 put together in one small document as well as summaries of the financial models and theories (CAPM, Gordon Growth Model, Dividend Discount Model, WACC and Modigliani-Miller Theorem). It also includes all the relevant terminology and their defi...

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  • December 8, 2024
  • 6
  • 2023/2024
  • Other
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FINANCE FORMULAE


1+𝑔 𝑛
1−( 1+𝑟 ) (1+𝑟)𝑛 −(1+𝑔)𝑛
Annuity: PV = 𝐶 ( ) 𝑭𝑽 = 𝐶 ( )
𝑟−𝑔 𝑟−𝑔




𝐶 𝐷𝑡+1
Perpetuity: PV = & 𝑃0 =
𝑟−𝑔 𝑟𝑒−𝑔



𝑅𝑞𝑜𝑢𝑡𝑒𝑑 𝑚
EAR = (1 + ( 𝑚
) )−1




𝐷𝑡+1 +𝑃𝑡+1 −𝑃𝑡 𝐸(𝐷𝑡+1 )+𝐸(𝑃𝑡+1 )
Realized Return Rate: Rt+1 = Pt =
𝑃𝑡 1+𝐸(𝑟)



𝑇
Forward Price: F0, T = 𝑆0 (1 + 𝑟𝑟𝑓 )


𝐾
Put-Call-Parity: 𝐶 0 + 𝑇 = 𝑆0 + 𝑃0
(1+𝑟𝑟𝑓 )



𝐵 𝐶 −𝐶 𝑢𝐶𝑑−𝑑𝐶𝑢
Replicating portfolio Option price = 𝑆0 ∆ + 1+𝑟 , where ∆= 𝑆𝑢 −𝑆 𝑑 & 𝑩=
𝑟𝑓 𝑢 𝑑 𝑢−𝑑



𝑞𝐶𝑢 +(1−𝑞)𝐶𝑑 1+𝑟𝑟𝑓 −𝑑
Risk Neutral method: 𝐶0 = 1+𝑅𝑟𝑓
, where 𝑞 = 𝑢−𝑑
𝑎𝑛𝑑 𝑖𝑠 𝑟𝑖𝑠𝑘 𝑛𝑒𝑢𝑡𝑟𝑎𝑙 𝑝(𝑢𝑝𝑠ℎ𝑖𝑓𝑡)

• Cu & Cd are in relation to K whereas u & d are in relation to S0




E(R) = ∑ 𝑃𝑖𝑅𝑖
1
Var(R)= volatility2 = 𝜎 2 = ∑(𝑅𝑖 − 𝑅̅)2 = 𝑆𝐷2
𝑁−1

• 𝜎𝑅2 = ∑ 𝑃𝑖(𝑅𝑖 − 𝐸(𝑟))2

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