Hi, I am confused about why in questions 4.6 and 4.19 (1+i)- logN(nµ,nσ2 ) and in 4.13 and in the exam style question of ch:15 it is (1+i)-logN (nµ,n2σ2)?? Also can you explain me how do we calculate P(Z>any number)?? Thanks
Cant tell you about the three questions since I haven't done that yet. But P[Z>any number] can be calculated using Standard Normal Probability Tables from the Tables. I guess that is what you are asking.
Thanks Kartik. Ive ordered the tables and then i'll try to calculate that. But i am still waiting for a reply to my other question.
Don't have access to the questions but suspect it's along the lines of one being a random rate each year eg 2%, 5%, 3% etc the second being being a random rate that applies for n years, ie if it's 4% its 4% for every year.
Didster's right. In the first two cases you have the "variable" model, whereas in the Exam-Type question you have the "fixed" model.
Thanks John and Didster. But still in Question 4.24 we have "rates of interest independent of the rates of interest in all previous years" and hence its a fixed interst model. But we have taken lnSn - N(0.04n, 0.09n) instead of lnSn - N(0.04n,0.09n2). Also in Q4.24, how did they standardised z equation equal to -0.6745? Further to that,I m still not sure which table to use to get value for P(Z>any number). Ive got Formulae and tables booklet. Thanks
The "independent" indicates that it is the "variable" model. Since for the "fixed" model the interest rates are the same in each year - so they won't be independent. They used page 162 of the Tables and see that P(Z>0.6745) = 0.25 so by symmetry about 0 we have P(Z<-0.6745) = 0.25 hence P(Z>-0.6745) =0.75. Use P(Z>...) = 1 - P(Z<...).
