Equivalent Periodic Return
- Thread starter bhar
- Start date
Suzanne Evans
Well-Known Member
bhar,
In the future, can you please post under the corresponding topic? I'm going to move it out of Today's Quiz. Thanks!
Suzanne
In the future, can you please post under the corresponding topic? I'm going to move it out of Today's Quiz. Thanks!
Suzanne
Hi bhar,
Here is the underlying XLS https://www.dropbox.com/s/sslcqspxswacwgn/hull.04.01.xls (it is my expansion of Hull Table 4.1)
It applies the formula above the table on page 58 for the discrete return, which, unfortunatey, I can see has a typo, and should read:
R(m) = m*(exp[R(c)/m] - 1).
In the case of m=2 (ie, semiannual compounding), R(2) = 2*(exp[9.531%/2] - 1) = 9.7618%
What this means, by definition, is that 9.531% compounded semiannually is "equivalent to" (produces that same terminal value) 9.7618% compounded continuously:
100*exp(9.531%) = 100*[1+9.7618%/2]^2 = $110
(I think the table is frankly confusing: the first column, Terminal Value, is used in Hull's Table 4.1. Then I added the next two columns). Thanks,
Here is the underlying XLS https://www.dropbox.com/s/sslcqspxswacwgn/hull.04.01.xls (it is my expansion of Hull Table 4.1)
It applies the formula above the table on page 58 for the discrete return, which, unfortunatey, I can see has a typo, and should read:
R(m) = m*(exp[R(c)/m] - 1).
In the case of m=2 (ie, semiannual compounding), R(2) = 2*(exp[9.531%/2] - 1) = 9.7618%
What this means, by definition, is that 9.531% compounded semiannually is "equivalent to" (produces that same terminal value) 9.7618% compounded continuously:
100*exp(9.531%) = 100*[1+9.7618%/2]^2 = $110
(I think the table is frankly confusing: the first column, Terminal Value, is used in Hull's Table 4.1. Then I added the next two columns). Thanks,
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