1
$\begingroup$

I couldn't come up with a proper formula for the scenario below. I'm not so good at Maths.

With,

$X$ - monthly gains in percentage
$C$ - Initial capital
$N$ - number of years
$M$ - Amount gained (only) after which, gains so far can be re-invested.

I need a formula which can give me the compounded amount for the initial capital X after N no of years

Example: With $3\%$ monthly gains, $M = 30000$ for an initial capital of $10$ Lakh each month would give me $30000$ which equals $M$ , hence the gain of $30K$ can be reinvested next month. Hence gains after second month would be $3\%$ of ($10$ lakh + $30000$).

Let me know if the question is not clear.

To give you some context on why I need this, I m investing in some kind of options(stock derivatives) strategy. I know the average monthly $\%$ gains(expectancy) but the monthly gains can not be reinvested immediately as average cost of a trade is say $30000$. Hence I cannot apply the compound interest formula I believe

$\endgroup$
1
$\begingroup$

Answer:

Update 1:

I thought about it and created this EXCEL WORKSHEET which I thought might be helpful.

This seems to be the right way to do it. Earlier method was wrong. You will see four images, 1) When transaction cost = 0%, Option not to trade the interest and Option to reinvest are the same. 2) When transaction cost = 3% 3)when transaction cost is .5% and revinvestment rate is 6% and at you described) and finally when the transaction cost is 4% then you will the ROI of the two options in all scenarios. Let me know if this is what you looking for. If you need the worksheet, I shall email it to you.

enter image description here

enter image description here

enter image description here

enter image description here

Good Luck

Thanks

Satish

$\endgroup$
  • $\begingroup$ Thanks. Please confirm if this correct. Meanwhile, I will also start validating :- As you said, It makes sense logically $\endgroup$ – chedine Aug 24 '14 at 16:54
  • $\begingroup$ Great, this should do. Looks like it can only be solved using recurrence.. $\endgroup$ – chedine Aug 25 '14 at 3:57
  • $\begingroup$ You can input the logic in EXCEL using a simple "IF" statement to replace the MAX** component and compute the Future value. I will let you do that. If it is useful, accept the answer and upvote if possible $\endgroup$ – Satish Ramanathan Aug 25 '14 at 4:16
  • $\begingroup$ Sure, got it and thank you. $\endgroup$ – chedine Aug 25 '14 at 5:47
  • $\begingroup$ I have made an update and see the solution. I was wrong before and I am hoping that I am right this time if I understand your problem correclty. Thanks for accepting $\endgroup$ – Satish Ramanathan Aug 25 '14 at 9:26

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.