Abstract
In this chapter, we give names to some basic concepts—assets, prices, returns, positions, portfolios, and profit-and-loss—and introduce a few related notational conventions.
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Notes
- 1.
Interest rates and their compounding conventions are inseparable. Annual compounding with r, over a one year horizon, means we have to compound with (1 + r). Semi-annual compounding with r, again over one year, means we must compound with \((1+\frac {r}{2})^2\). Because \((1+\frac {x}{n})^n\) converges to e x for large n, compounding with e r also seems to make sense as the limiting case of infinitely small, continuous compounding steps.
- 2.
Careful with log returns in Excel: the natural logarithm is required, so use the LN function instead of the (tempting but base-10) LOG one.
- 3.
This price approximation is simple, but there are others far more complex. They are the subject of quantitative finance, which interpolates new asset prices from known ones.
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Auer, M. (2018). Basic Terms and Notation. In: Hands-On Value-at-Risk and Expected Shortfall. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-319-72320-4_3
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DOI: https://doi.org/10.1007/978-3-319-72320-4_3
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Publisher Name: Springer, Cham
Print ISBN: 978-3-319-72319-8
Online ISBN: 978-3-319-72320-4
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