September 2005 - Q4(ii) & (iii)

[yeah_baby]

Sorry to just add to the list of questions waiting for an answer... if I could answer any of the others I would!

In the examiners report for this question (S05Q4(ii)) where does the equation

N phi(d1) = 250,000

come from?

Is it from saying that to hold a hedged portfolio you would hold an amount delta of shares, and then calculating delta by doing df/dS on the black-scholes formula?

If so, why can you do this? i.e. why can you ignore that there is an S term in both phi(d1) and phi(d2)?

My problem with part (iii) is probably more to do with just being totally fed up with this question, but I can't see where the first line comes from... or even why you want to be looking at phi(d1)/phi(d2) in the first place! I don't get how they've done the interpolation!

Any help would be greatly appreciated, thank you

PS Apologies if phi is not the right Greek letter (can't work out how to put it in as a symbol)

 

[kathrynT]

This probably isn't the best answer to your question but the 2007 version of ASET says that only part (i) is applicable for the 2007 exams.

That's a bit of a cop out I know but hopefully means you wont waste too much time on it. There's plenty other stuff in CT8 to worry about without leaning things you don't have to!!

 

[yeah_baby]

Great news, that's good enough for me

Thanks

 

[yeah_baby]

Is the same true for April 05 Q10(iii)? Looked like a similar sort of thing going on in the examiners report...

I really need to start getting ASET!

 

[kathrynT]

Yep - I should be on commission!!

 

[Little Miss Actuary]

I really need to start getting ASET!

You don't need ASET - this info is in the CT8 FAQs thread. It's a sticky at the top of this board.

 

[yeah_baby]

You don't need ASET - this info is in the CT8 FAQs thread. It's a sticky at the top of this board.

Thanks - you'd think I'd be more on-the-ball by my last CT exam!