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
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
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 wrongPhew, 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
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!
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?!?!