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A common model for the price movement process of non-dividend-paying stocks is the Geometric Brownian Motion (Robert Brown (1773–1858) was a Scottish botanist). Initially, Brown observed that dust […]
Without the discoveries of the Japanese mathematician Kiyoshi Itô (伊藤 清, 1915–2008), the Black–Scholes–Merton model — and therefore the modern derivatives market — could not exist. Before moving […]
If physicists use the Wiener process to describe the movement of molecules, for finance it is interesting because it helps us understand the price behavior of stocks and […]
Why is uncertainty considered proportional to the square root of time (√t)? A Markov process (named after the Russian mathematician Andrey Markov (1856–1922)) is a special case of […]
🎲 Have you ever noticed how life, business, and markets share one thing in common — uncertainty? Finance doesn’t ignore that; it embraces it.John Hull’s classic work on […]
Using the Risk-Neutral Probability Method in Option Valuation is a bit counterintuitive. Why doesn’t the option price depend on the expected movement of the underlying stock — its […]
When an interest rate swap is contracted, its initial value is zero. However, after some time passes, its value may become positive or negative for one of the […]
To value derivatives, traders rely on LIBOR (London Interbank Offered Rate) as the risk-free interest rate. The problem is that these rates are only available for up to […]
How can we assess the market’s expectation about the future change in the price of an asset? For example, if today the spot price of one ton of […]
The Futures Price Formula for Commodities Requires Additional Ingredients Such commodities can be predominantly investment-oriented (e.g., gold, silver) or predominantly consumption-oriented (e.g., copper, oil). The latter requires taking […]
Since forward pricing formulas are used to evaluate futures, the question arises: are futures and forwards priced the same? Theoretically, in the long run, it is said that […]
Before we move to valuing a forward contract, it’s important to understand the connection between the spot price of an asset and its forward price. Let’s start with […]
💡 Most investors know how to make money when stocks rise… but did you know you can also profit when stocks fall? That’s called short selling (or “shorting”). […]
The evaluation of a Leveraged Buyout (LBO) transaction is a rather complex process. Such transactions involve several key aspects: The stages of the evaluation methodology in practice are […]
A common mistake is valuing a company by comparing its multiples with those of other companies in the industry in a superficial way. The issue is that selecting […]
*Corporate Valuation Theory, Evidence and PracticeMark E. Zmijewski; Robert W. HolthausenSecond Edition
How should WACC be calculated when the capital structure includes convertible bonds? The value of a convertible bond is split into two components: The value of the conversion […]
📌 An organization’s accumulated loss is an asset from a tax savings perspective, and should therefore be considered in valuation. 📊 Such an asset is divided into two […]
