April 2006 Exam

I found the paper very reasonable.
Very wordy, and a lot of easy marks.
The only question that could have potensially produced problems was:
Black-Scholes (Question 8)
Term structure question.

For some reason my term structure question didn't simplify neatly, even though I knew where I had to end up. Possibly an algebraic mistake?

Although I attempted Black-Scholes question, I'm not entirely shure if I followed the correct strategy.

Last question was quite OK.

There was a lot of listing questions, which I thought was easy.

What are your thoughts?

I'm very glad its over.
What's next? ST6
I don't think so!

Erik

 

Ditto

Also think it was pretty reasonable! Problem with that is that the pass mark is gonna be so much higher, so it's rather a question of beating the rest.

The term structure was definitely a typo, should have been a "-" instead of the "T". Did it both ways, hopefully getting marks for that.

Were you supposed to compare time values in question9? With 1,000 share employer question: First one was a call with K=150 and next one a put with K=200????

 

I interpreted it this way.

First one a long call, strike price 1,50
Second one a short call, strike price 3,50 (=1,50+2)

It gives the correct payoff diagram (its actually a bull spread)
Luckily I have done a second year course on derivatives so the choice came quite naturally.

I think this one was probably one of the most difficult Black-Scholes questions.

I feel as though I might have missed something, since each of parts (i) and (ii) was 6 marks. Seemed like a bit much, for just doing a simple calc, which makes me think there might be something more.

I'm glad you think Term structure was a typo, because I think so too. If what you said is correct then it's the same question as last year.

I didn't really get the later parts of question 8 (B-S), and my values for the contracts were very low, which made me very suspicious.

Can't really say anything about question 9's last part, was kinda tired by then and just wrote something down.

Any other comments.
Erik

 

Oh yeah, I'm really glad about the wilkie question, about the same as September 2000 question 3. By pure chance (luck) a question I did yesterday.

Erik

 

Repeat

it seems like alot of questions came out of past ones. I did the exact same Wilkie yesterday! Still can't believe the amount of theory they've asked, not complaining though.

Good on you about the derivative one. I wasn't so lucky. My answers were very low to the last one as well.

Anyway, the EXAMS ARE OVER, this time round...

 

Little children in the park.

Little children in the park.


Once upon a time there was an bad man.

He used to kidnap children in the park.

He used to entice the little children in the park by showing them and giving them nice sweets.

Once the children came close to him; he made them unconscious by one special uppercut, and succeeded in kidnapping them.



Now, this is what the examiner did to us.

First he gave us some sweet questions,

Then when the time came he gave us Painful uppercuts.

Let’s be frank, no one of us can pass without the last two questions:

and the examiner kept all the sting in those questions, and battered us with painful uppercuts-when it mattered most.

We were already quite exhausted by then, and quite time short.

The uppercuts could not have come at a worse time.


We have to see, in entirety, what the examiner did to us.

Let’s not be happy with those measly sweets; which are inconsequential.


IMO The paper was hard from the inside, but soft from the outside.

Kind of a sweet poison.

Regards.
hi5

 

I thought the paper was better than both the last two papers. Lots of lists which is good.
Couple of things worry me:
- my wilkie confidence interval was massive, something like (-0.8,0.9)
- Q8 part one, was very low ~ £19 (after being multiplied by 1000)

Didn't do the rest of Q8, but did most of Q9 (whether it's correct is another thing).

Didn't get round to attempting the term structure differential equation. Was it still do-able even with the typo?

 

pretty easy exam, although i preferred last 2 papers.

i wondered why my market price of risk turned out so nasty, damn typos!!!

last question was great, so many marks for easy stuff, although i thought 1 mark for pricing the call by binomial method was just plain mean!

 

The wilkie ci is supposed to be that big. Check out the solutions to September 2000 109 exam. It is due to the large standard deviation.

My answer for question 8 first part was also near your answer, can't remember exactly, only that it was below 20 pounds. I mentioned that this is reasonable since no stock is expected to jump from 1 pound to 1,5 pound within a year. So a low value is expected, but I must admit I was very worried about it.

The PDE gave a market price of risk that couldn't be simplified and this gave problems in part (ii), but I knew what I was aiming at, so I knew what the real market price of risk should be to produce a sde for the short rate that is a martingale under Q. (Remember that the drift must be zero).

Cheers
Erik

 

Gareth, that's what made me worry. 6 marks for plugging a few variables in B-S formula seems unlikely. Guess the trick was in knowing what the non-standard contract was in terms of plain vinillas.

Last question, so many marks for apparantly nothing, seems strange.
Erik.

 

the wilkie one gave a reasonable confidence interval for Q (remember I=Q/Q) - it was quite tight.

The market price of risk, should have ended up with drift r_t not 0

 

Gareth.

Wilkie: They gave inflation (I(t)) not consumers price index (Q(t))
What I said is the drift of r_t should be zero. Check last years April paper if you don't believe me.

(in wilkie I did wonder whether the inflation was a rate as in september 2000 or a force, think it was force)

Cheers.

 

By the way, I = ln(Q/Q)

Erik

 

I(t) was the inflation index, not actual inflation Q, and i agree about r_t having zero drift under Q, i meant B(t,T), should have drift r_t under Q if all works out...which it didnt as i was stuffed by the typo...

 

Major bummer again.


Anyway the CAPM question was very tricky, wasnt it?

And the B S question qualifies for the hardest question on options ever in any exam.

The martingale derivation question was mean-ish, as well.

OK, who managed to mess up on the (non-mean-ish) put call parity question?

And who was time short?

And what about the graph of the derivative of the delta with time.

That was a real thinking question.

Tricky stuff===tricky marks===tricky result!

 

wasnt the delta graph with respect to share price, not time? i draw it for several durations to expiry.

time wise, i was ok.

 

But what did the delta graph look like? The one in the core reading was for a call? Just mirrored around the horizontal axis? Deep-out-of-money tends to zero, deep-in-the-money tends to -1?

All this talking about is making me doubt myself! Thanks everyone...

 

Yes, sorry a typos by me!
(Guess I am spending to much time with the examiners..............jk)

Just the fact that we had to caluclate the market return and identify the risk free asset in the portfolio.

When i mean tricky, I mean it as compared to the marks as well.

(am I excellent in spin or what?)
Btw my knowledge of spin has an inverse relation with CT8.

 

Well, I've just got in after a few nice drinks. I'm just happy it's over and that the paper was half reasonable.

If I was half sober most of your comments would have disturbed me and lead me to doubt my good feelings regarding this paper.

I started with the last questions first so that I could have time on the time-consuming 5-7 markers at the start. Overall though, a happy paper. A happy drink after and I'm so glad it's finished.

I just hope I never have to sit this paper again.

 

Yes the graph in the notes was for a call. I don't think I sorted it out. Ran out of time. Never got back to teh interest rates question.

27 marks for one question.

Well whatever I'm going on Vacation for the whole month of May time to start packing.