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Python for Finance

Python for Finance

3.5 (33)
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Python for Finance

Python for Finance

3.5 (33)

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 (17 chapters)
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16
Index

Definition of NPV and NPV rule

The Net Present Value (NPV) is defined by the following formula:

Definition of NPV and NPV rule

Here is an example. The initial investment is $100. The cash inflows in the next five years are $50, $60, $70, $100, and $20, starting from year one. If the discount rate is 11.2%, what is the project's NPV value? Since only six cash flows are involved, we could do the calculation manually:

>>> r=0.112
>>> -100+50/(1+r)+60/(1+r)**2+70/(1+r)**3+100/(1+r)**4+20/(1+r)**5
121.55722687966407
Using the scipy.npv() function, the estimation process could be simplified dramatically:
>>> import scipy as sp
>>> cashflows=[-100,50,60,70,100,20]
>>> sp.npv(0.112,cashflows)
121.55722687966407

Based on the preceding result, the NPV of this project is $121.56. A normal project is defined as follows: cash outflows first, then cash inflows. Anything else is an abnormal project. For a normal project, its NPV is negatively correlated with the discount rate; see the...

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