Hi All
This Sept exam was on very tough, and that view will be shared by many out there!
It seems that the most well answered questions were Q1 and Q8. I think thati did ok in them, and being optimistc, will managed to get half of the available marks.
Q2 - part one was ok, but part 2, asking about the reason for using straddles and strangles, well...i waffled some points like the trader's view on volatilty, and his view on future economi events in a country producing natural gas. Even used the example of Nigeria, and the unstable economic, political and social unrest there, and said how this would affect the convenience yield, and hence which strategy would be better. I think that it also depends on how much of his upside is the trader ready to give up. anyway, dont think that i'll go far in that part!
The BSM modify question was six marks, and had three parts, i assumed that we had to modify the formiula (put and call), so that all together we would have six modifications, one mark each. I did i think mention that the third one, which was about futures, would become the Black formula. The next part was i think, the mst ludicrous question that could be asked in such an exam. How to modify BSM for stichastic interest rates? LOL...if i knew the answer to that question, I would not be sitting the CiD!!! I did use the hint, and said that bring in more uncertainty in the pricing process would need us to review the level of volotility, and suggested some way (dodgy though!) of doing that. I did also say that it would be very mathematically complex to incorporate stochastic interest rates when deriving the PDE, and hence solving it.
The last question was doable, if you had done similar questions before. I did ok on part one, managed to get through part two, and did the calcs for part three. The last question, about the relationship between the volatility of swaptions and that of bond options is a repeat if some ACID question.
The market risk question - Wrote what i knew about the different types of risk, explained how they worked and their implications for a portfolio manager, and tried to apply them to the portfolio given. I didnt quite manage to do the latter though! Hull and White model- The question came from an ACID paper. I managed to remember some points, but i think that out of three,i'll get 1.
I managed to explain something for th numeraire and work out the mu of g. For the conditions, just waffled a bit and then did the cals in the end if my memory is right.
The hardest two questions were Q4 and Q7. For both of them, i tried to write soemthing down.
For Q4, i struggled for finding the strike, but managed to come up with something, perhaps worth 0.5/1 mark. I could not prove that the strike should be 2700, but did use it to do the calcs though.
for Q7, I managed bits and pieces here and there, though honestly i do not expect to be scoring much out of it. Tried to glean one or two easy marks that were available.
Overall, i think that i did not score much in the easy part to pass this time round. I think that the pass mark will be around 50, and the pass rate in the low 30s. What are your views on that?
