Book Image

Python for Finance - Second Edition

By : Yuxing Yan
5 (1)
Book Image

Python for Finance - Second Edition

5 (1)
By: Yuxing Yan

Overview of this book

This book uses Python as its computational tool. Since Python is free, any school or organization can download and use it. This book is organized according to various finance subjects. In other words, the first edition focuses more on Python, while the second edition is truly trying to apply Python to finance. The book starts by explaining topics exclusively related to Python. Then we deal with critical parts of Python, explaining concepts such as time value of money stock and bond evaluations, capital asset pricing model, multi-factor models, time series analysis, portfolio theory, options and futures. This book will help us to learn or review the basics of quantitative finance and apply Python to solve various problems, such as estimating IBM’s market risk, running a Fama-French 3-factor, 5-factor, or Fama-French-Carhart 4 factor model, estimating the VaR of a 5-stock portfolio, estimating the optimal portfolio, and constructing the efficient frontier for a 20-stock portfolio with real-world stock, and with Monte Carlo Simulation. Later, we will also learn how to replicate the famous Black-Scholes-Merton option model and how to price exotic options such as the average price call option.
Table of Contents (23 chapters)
Python for Finance Second Edition
Credits
About the Author
About the Reviewers
www.PacktPub.com
Customer Feedback
Preface
Index

Stock valuation


There are several ways to estimate the price of a stock. One method is called the dividend discount model. The logic is that the price of a stock today is simply the summation of the present value of all its future dividends. Let's use the simplest one period model to illustrate. We expect a $1 dividend at the end of one year and its selling price is expected to be $50. If the appropriate cost of equity is 12%, what is the price of stock today? The timeline and future cash flows are shown here:

The price of stock is simply the present values of those two future cash flows, $45.54:

>> (1+50)/(1+0.12)
>>>
     45.535714285714285
>>> import scipy as sp
>>>sp.pv(0.12,1,1+50)
     -45.53571428571432

Let's look at a two-period model. We expect two dividends of $1.5 and $2 at the end of the next 2 years. In addition, the selling price is expected to be $78. What is the price today?

Assume that for this stock, the appropriate discount rate is 14%. Then...