September '07

Well that's one exam down.

I say down... It'll most likely be getting right back up again as soon as results come out.

Didn't like it. Didn't like it at all.

And you guys?

 

Taking into consideration some of the nightmare CT8 exams from the past, I didn't think today's was too bad.

Having said that, I still failed it miserably. Just didn't leave myself anywhere near long enough to prepare - having 3 study days/exam will do that to you.

One lad in our centre left after 30 mins on the dot. I felt like shaking his hand and saying "don't worry mate, I'll be out in a few minutes..."

Ahh..

 

I thought most of the questions were OK.

Except that one on MVPT and CAPM. Just couldn't figure out what they were getting at!

Also the question on Ito's Integral's was pretty tough mainly because of the S(t) function

 

Phew, here's hoping that's the end of my loong journey through the CT maze.

Felt the paper had a fair balance between bookwork and some real testers. Nobody ducked out of this paper early.

The Merton model questn was similar to the one in April's paper where they asked for an outline of the steps. I still found it difficult to follow through the calcs. It also fooled me into thinking for a while that the previous questn on the 2 investors' meaures of risk using a default prob was also a credit risk one. I eventually used a normal approx to the binomial for investor 2 (with 1000 independent bonds) and a numerical approach, again using E and V in a normal approx for investor 1 (1000 bonds with a single borrower). Anyone else do that?

I think I missed a trick on the hedging strategy questn with the stock, cash and 3 derivatives that we were asked to comment on, it seemed too straightforward and the numbers I got for derivatives C and D were in the 10^8 range, which seems unreasonable (then again, they had low deltas).

btw a similar Ito PDE question became notorious in a varsity paper I wrote over 5 years ago, except there our dear Prof expected us to remember the equivalent representation of cosh

 

My number were in the same range for the hedging strategy and I used the same approach for the question for the 2 investors.

Can anyone explain to me on the question on MVPT and CAPM should have been answered. I couldn't get anywhere with it!

 

I did the same thing for question 7 - normal approximation had to be the way forward.

Couldn't do the ITO question at all, couldn't remember how to do any of the later parts of questions 1,2 and 3 either.

I managed to calculate a credit spread of -3.11% for the Merton model question - here's hoping for some method marks!

For the interest rate models question did anyone else just copy a lot of formulae out of the book? Other than the limitations of one factor models all I did was copy it out and define the terms.

All the bookwork was easy enough, there just wasn't nearly enough of it for me.

Reckon I scored somewhere in the low 50s. Probably looking at an FA. Anyone got an idea of the pass mark?

 

I did the same but couldn't figure out why I was getting 3 marks for it!
I know there is a proof in the core reading but this isn't what they asked for and would have been alot of work for 3 marks.

 

The Merton question: Did you guys use the Black-Scholes formula to calculate the call option, setting both the S(0) and K to be the asset amount the bondholders are entitled to? I think I've got a 3+% dividend yield, which doesn't seem to make sense since it's lower than the risk-free rate of 5%? I have a feeling the parameters I set were all wrong

Derivatives/Delta-hedging question: I got big numbers like you too, wannabeactuary, but not as big.... I think mine's in millions, with one of them in short position...

Ito process: I don't know how to do! Argh!

Ok... reading some of the replies here are making me worried. Seems like many of my answers could be wrong

 

I am almost positive that for the interest rate model questions, that's all they need. If you look at April 2007 Q1 - they asked the same thing for Black-Scholes PDE, which you could copy out from the formulae book, and transform them to Greeks - voila! 4 marks for 3 lines only!

I agree... I wished they had asked more bookwork...

 

You are referring to question 6 right? I remember the first part asked for variances and covariances of each asset - but I thought the standard deviations for each asset were already given? Did I miss out something big, or was it meant to be very straightforward?!?!

As for the tangent line the question asked for - that's the CAPM equation. We can get E(Rm) and Var(Rm) using the weightage of asset A,B,C which was given (God knows why they find the need to put them in transposed matrix form!). So I just substitute these into the CAPM equation for the answer..... I hope I didn't screw up!

 

Its April 08 for me.........................

 

I thought it was tricky but alright in general.. I should have passed

I'll add a bit more substance to this now, was a bit rushed off my feet the other day:

Merton Model: It was hard to do that way if you couldnt remember the method, but it was only a hint, so does that mean we HAVE to do it that way, I made a simplyfying assumption to get to my answer... (i.e if S(t) < K the bondholders get nothing)...

Cosh(x) model... why? whats the point, its not testing our understanding, its tripping us up with algebra and differentiation

The rest was alright I thought... seemed to take ages though

 

Done.

And it shall never bother me again.