April 2010 questions

I am having problems editing or replying to this post. Will try to get it fixed. May be that the post is too long.

 

Question 1 part

(ii) So the idea here is that we should know all kinds of possible securities out there that increase almost on a daily basis like the LOC in question? I don't think it's fair to ask like this because if one doesn't know the security then they are doomed, but it doesn't reflect on your strength in the subject?


Thats the challenge of an SA subject. You are tested on stuff outside the course, and there is a bit of hit and miss. (This was a strange one though)


Does anyone know where I can track the latest new hit securities?

(iii) the paragraph just above this question says "the customer sell short share" is this the same as short selling?

Yes


(v) Isn't the 30-day VaR = 1-day VaR * sqrt(30), the examiners' report says 30-day VaR = 1-day VaR/sqrt(30)?

This is a typo. You are right. The 30 day VaR will not be smaller than the 1 day VaR

(vii) Bullet 3, I was under the impression that the customers buy the bonds and the bank issues them, hence it is the bank that can default, I am not sure why the customers will sell protection to the bank on it's own default?

Also, what is the meaning of;- "fall in the market value of that bond as a result of default''?


I think the idea was that the customers sell the bank protection against the company's default. This enables the bank to elliminate the credit risk on any bonds that it buys to provide the cashflows from the other proucts. It was a strange idea in this question.

(ix) The examiners' report says a structural approach can be used to price a CDS, I see where this comes from as it is the default approach for valuing credit derivatives that is shown in the Core-reading...however, this isn't anywhere near valuing Credit Derivatives and I feel it is equally misplaced in the Core-reading. The purpose of the Structural model is to quantify the risk neutral probability of defaulting on debt...Does this have anything to do with valuing Credit Derivatives?


If you have an unquoted bond and you want to price a CDS, the first thing you need is the bond's price and hence its yield. The structural approach can do this for you. Once you have the yield, a starting point for the CDS is "yield on the corporate bond) - (yield on the government bond).


Also on the notes, Acted correctly points out that a company's equity can be valued using a structural model and I agree, however can someone give me a contextual view of using the reduced form model to value equity? (I am lazy to think)

I don't think the reduced form works like that. It targets the bond without going through the equity.

(x) I has included attaching equity warrants to the bonds...anyone to point out if I was wrong?


Warrants converting into what though? The bank's shares - I would say not. The company's shares would be an advantage but hard to hedge.


Question 2 part;
(i) (a) what part of the core-reading is being tested here because section 2.1 of the Core-reading says the governments macroeconomic framework is designed to maintain long-term economic stability?

Chapter 3 page 7 of the 2015 material.

 

Question 1 part

 

I dont think it can really. Its or valuing bonds.