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Course6:Spring2005-1-GOONTONEXTPAGE
MorningSession
COURSE6
MORNINGSESSION
SECTIONA–WRITTENANSWER
Course6:Spring2005-2-GOONTONEXTPAGE
MorningSession
**BEGINNINGOFEXAMINATION**
MORNINGSESSION
1.(5points)Yourcompanyis*uatingactiveandquasi-passiveinvestmentstrategiesfor
bondportfoliomanagement.
(a)Defineeachquasi-passiveindexationapproach.
(b)Describetheadvantagesanddisadvantagesofeachquasi-passiveindexation
approach.
(c)Explainthereasonsyourcompanywouldconsideranactiveinvestmentstrategy.
(d)Describethesectorandsecuritystrategiesthatanactiveinvestmentmanager
wouldusetoselectindividualbonds.
2.(7points)Yourcompanyisofferinga15-yearterm-certainimmediateannuitywith
paymentslinkedtotheCPI.Policyholderscanwithdrawfundsondemandatmarket
values.
Theuniverseofavailableinvestmentsconsistsofthefollowing:
?Short-termT-bills
?Realreturnpublicbonds
?Corporatebonds
?Realestate
(a)Outlinetheadvantagesanddisadvantagesofeachinvestmentforbackingthis
annuity.
(b)Recommendaninvestmentstrategyusingtheinvestmentsavailable.
(c)Describethemajorcomponentsofanaccumulatedcashflowscenario-based
model.
(d)Outlinethemajorcomponentsoftheinvestmentpolicystatementforthisproduct.
Course6:Spring2005-3-GOONTONEXTPAGE
MorningSession
3.(5points)Youaregiventhefollowinginformation:
BondTermEffectiveDurationEffectiveConvexity
A53.1-41.7
B54.523.4
C54.221.3
D52.764.5
TheoptionandpricecharacteristicsofBondsA,B,CandDareasfollows:
?onebondisoption-freewithacurrentpriceabovepar
?onebondisoption-freewithacurrentpricebelowpar
?onebondiscallable,pricedatpar
?onebondisputable,pricedatpar
(a)DeterminetheoptionandpricecharacteristicscorrespondingtoeachofBondsA,
B,CandD.Explainyouranswer.
(b)Assessthelimitationsofdurationasaninterestrateriskmeasure.
(c)Defineconvexity.Compareeffectiveconvexityandmodifiedconvexity.
(d)CalculatetheapproximatepercentagepricechangeforBondsAandBassuminga
decreaseinyieldof0.50%.
Showallwork.
Course6:Spring2005-4-GOONTONEXTPAGE
MorningSession
4.(10points)Youaregiventhefollowingwithrespecttotreasurysecuritiesasoftoday,
May13,2005:
SecurityYearstoMaturity
AnnualCouponRate
PaidSemi-annuallyYield-to-maturity
A0.50%3.0%
B1.00%3.2%
C1.56%3.5%
D2.05%3.6%
(a)Calculatethespotrateforeachmaturitydate.
(b)Explainhowarbitrageprofitscouldbemadefromcouponstripping.
(c)Calculatetheone-yearforwardrate,oneyearfromtoday.
(d)Withrespecttothepureexpectationstheory
(i)Describethetheory
(ii)Describetheinterpretationsofthetheorythathavebeenputforthby
economists
(iii)Explaintheshortcomingsofthetheory
(e)Withrespecttoothertheoriesoftermstructureofinterestrates:
(i)Brieflydescribeeachtheory
(ii)Usingeachtheory,comparetheone-yearspotonMay13,2006,withthe
one-yearforwardratecalculatedin(c)
Showallwork.
Course6:Spring2005-5-GOONTONEXTPAGE
5.(5points)YouaregiventhefollowinginformationwithrespecttoStockXYZ:
?price:50
?variance:4%
?dividendrate:0%
Therisk-freeratecompoundedcontinuouslyis6%.
YouarealsogiventhefollowingselectedvaluesfromtheStandardNormalCumulative
DistributionFunction:
ZN(Z)ZN(Z)ZN(Z)
.010.5040.110.5438.210.5832
.020.5080.120.5478.220.5871
.030.5120.130.5517.230.5910
.040.5160.140.5557.240.5948
.050.5199.150.5596.250.5987
.060.5239.160.5636.260.6026
.070.5279.170.5675.270.6064
.080.5319.180.5714.280.6103
.090.5359.190.5753.290.6141
.100.5398.200.5793.300.6179
(a)Listtheassumptionsrequiredforput-callparity.
(b)UsetheBlack-Scholesformulatocalculatethepriceofaone-yearEuropeancall
optiononStockXYZwithastrikepriceof52.
(c)Calculatethepriceofaone-yearEuropeanputoptiononStockXYZwithastrike
priceof52.
Showallwork.
Course6:Spring2005-6-GOONTONEXTPAGE
MorningSession
6.(6points)Youaregiventhefollowingwithrespecttoaportfolioofbonds:
Bond
Annual
CouponPar
Market
Value
Option
Features
Yearsto
Maturity
A4.50%100100none2
B6.00%100
callableinone
yearat1012
Youaregiventhefollowingwithrespecttoabinomiallattice:
?rL:4%
?σ:15%
?timeintervalbetweennodes:1year
(a)Calculatetheone-yearspotrate.
(b)Calculatethetwo-yearspotrate.
(c)Calculatetheone-yearimpliedforwardrate.
(d)Calculateth*ueoftheoptioninBondB.
Showallwork.
7.(4points)OutlinetherisksfacedbyaU.S.investorinpurchasinga10-yearprivatelyplaced
U.S.corporatecallablebond.
Course6:Spring2005-7-GOONTONEXTPAGE
MorningSession
COURSE6
MORNINGSESSION
SECTIONB–MULTIPLECHOICE
Course6:Spring2005-8-GOONTONEXTPAGE
MorningSession
1-5.Eachofquestions1through5consistsoftwolists.Inthelistattheleftaretwoitems,
letteredXandY.Inthelistattherightarethreeitems,numberedI,IIandIII.ONEof
thelettereditemsisrelatedinsomewaytoEXACTLYTWOofthenumbereditems.
Indicatetherelateditemsusingthefollowinganswercode:
LetteredItem
IsRelatedtoNumberedItems
(A)
X
IandIIonly
(B)
X
IIandIIIonly
(C)
Y
IandIIonly
(D)
Y
IandIIIonly
(E)
Thecorrectanswerisnotgivenby(A),(B),(C)or(D).
1.X.Yield-to-maturityreturnmethodI.Requiresanexplicitreinvestment
rateassumption
Y.TotalreturnmethodII.Iscommonlyusedforpricingand
trading
III.Ignoresthecapitalgainorlossfrom
securitysales
2.X.EffectivedurationmatchingI.Veryexpensivetoimplement
Y.CashflowmatchingII.Onlyworksforsmallchangesin
interestrates
III.Accountsforoptionsembeddedin
theassetsandliabilities
Course6:Spring2005-9-GOONTONEXTPAGE
3.X.Trackingerrorof68basispointsI.Assuminganormaldistribution,there
isa68%probabilitythattheportfolio
returnoverthenextyearwillbe
withinonestandarddeviationofthe
annualizedbenchmarkreturn
Y.Portfolioβof68%II.Theportfoliohaslessvolatilitythan
thebenchmark
III.Expecta68basispointincreaseinthe
portfolioreturnifthereisa100basis
pointincreaseinthebenchmarkreturn
4.X.PlannedamortizationclassesI.Pricedattighterspreadstothe
Treasurycurvethansequential-pay
bonds
Y.Accretion-directedclassesII.Redirectprincipalonly
III.Completeprotectionagainst
extensionofaveragelifeifinterest
ratesrise
5.X.IncreaseinvolatilityI.Decreasesth*ueofaputable
bond
Y.DecreaseinvolatilityII.Increasesth*ueofacalloption
III.Foragivenprice,increasesthe
option-adjustedspreadforaputable
bond
Course6:Spring2005-10-GOONTONEXTPAGE
MorningSession
6-10.Questions6through10consistofanassertionintheleft-handcolumnandareasoninthe
right-handcolumn.Codeyouranswertoeachquestionbyblackeningspace:
(A)Ifboththeassertionandthereasonaretruestatements,andthereasonisacorrect
explanationoftheassertion.
(B)Ifboththeassertionandthereasonaretruestatements,butthereasonisNOTa
correctexplanationoftheassertion.
(C)Iftheassertionisatruestatement,butthereasonisafalsestatement.
(D)Iftheassertionisafalsestatement,butthereasonisatruestatement.
(E)Ifboththeassertionandthereasonarefalsestatements.
6.
ASSERTION
ReturnsontheS&P500stock
indexarenotaffectedbystock
splits.
BECAUSE
REASON
Returnsonmarket-value-weighted
indicesarebasedonholding
investmentsinproportiontotheir
marketvalues.
7.
ASSERTION
TheextendedVasicekmodelis
abletoprovideanexactfittothe
currenttermstructureofinterest
rates.
BECAUSE
REASON
Thedrifttermintheextended
Vasicekmodelistime-independent.
Course6:Spring2005-11-GOONTONEXTPAGE
MorningSession
8.
ASSERTION
Firm-widestresstestsare
reviewedfrequentlybutchanged
infrequently.
BECAUSE
REASON
Stresstestsmaybeusefully
appliedtomarketsinwhich
illiquidconditionsproduceasset
pricejumpsandimpedesecurities
tradingduringtimesofstress.
9.
ASSERTION
TheFHAexperiencemethodis
rarelyusedasaprepayment
model.
BECAUSE
REASON
TheFHAexperiencemethoddoes
notreflecttheeffectofageonprepayments.
10.
ASSERTION
Ifarisk-freeassetisavailable,
onlyaggressiveinvestorswillbe
affectedbyarestrictionon
borrowing.
BECAUSE
REASON
Aborrowingrestrictiondrives
aggressiveinvestorstoportfolios
ontheefficientfrontierofrisky
assets.
Course6:Spring2005-12-GOONTONEXTPAGE
MorningSession
11.Afixed-ratebondwithamarketvalueof20millionandadurationof4isseparatedinto
threebonds.Twoofthebondsarefloatersandthethirdisaninversefloater.
Youaregiventhefollowinginformationwithrespecttothefloaters:
FloaterMarketValueDuration
A16million1
B2million0.5
Calculatethedurationoftheinversefloater.
(A)2.50
(B)3.06
(C)3.15
(D)25.20
(E)31.50
Course6:Spring2005-13-GOONTONEXTPAGE
MorningSession
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Course6:Spring2005-14-GOONTONEXTPAGE
12.YouaregiventhefollowingwithrespecttoStockX:
?Stockpricetoday:10
?Stockpriceoneyearfromtoday:either12or7
?Calloptionstrikeprice:11
Theannualinterestis5%.
Calculatetheno-arbitragecalloptionpriceonStockXasoftoday.
(A)0.67
(B)0.74
(C)1.40
(D)1.47
(E)3.33
Course6:Spring2005-15-GOONTONEXTPAGE
MorningSession
THISPAGEINTENTIONALLYLEFTBLANK
Course6:Spring2005-16-GOONTONEXTPAGE
MorningSession
13.Foraportfolioofinvestment-gradefixed-incomesecurities,rankthefollowingfactorsby
theirimpactontheportfolioreturnfromgreatesttoleast.
(A)Durationmanagement,individualbondselection,sectorselection
(B)Durationmanagement,sectorselection,individualbondselection
(C)Individualbondselection,durationmanagement,sectorselection
(D)Individualbondselection,sectorselection,durationmanagement
(E)Sectorselection,individualbondselection,durationmanagement
14.Youaregiventhefollowinginformationwithrespecttoastockportfolio:
StockPortfolioProportionβ
A75%1.25
B25%1.45
Themarketriskpremiumis4%.
Calculatetheriskpremiumoftheportfolio.
(A)5.0%
(B)5.2%
(C)5.4%
(D)5.6%
(E)5.8%
Course6:Spring2005-17-GOONTONEXTPAGE
MorningSession
THISPAGEINTENTIONALLYLEFTBLANK
Course6:Spring2005-18-GOONTONEXTPAGE
MorningSession
15.Youaregiventhefollowingwithrespecttoaportfolioofzero-couponbonds:
BondCurrentValueMaturityValueTimetoMaturity
A10001081.602years
B10001215.514years
Calculatetheyield-to-maturityforthisportfolio.
(A)4.3%
(B)4.5%
(C)4.7%
(D)9.6%
(E)10.0%
Course6:Spring2005-19-GOONTONEXTPAGE
MorningSession
THISPAGEINTENTIONALLYLEFTBLANK
Course6:Spring2005-20-GOONTONEXTPAGE
MorningSession
16-20.Eachofquestions16through20consistsoftwolists.Inthelistattheleftaretwoitems,
letteredXandY.Inthelistattherightarethreeitems,numberedI,IIandIII.ONEof
thelettereditemsisrelatedinsomewaytoEXACTLYTWOofthenumbereditems.
Indicatetherelateditemsusingthefollowinganswercode:
LetteredItem
IsRelatedtoNumberedItems
(A)
X
IandIIonly
(B)
X
IIandIIIonly
(C)
Y
IandIIonly
(D)
Y
IandIIIonly
(E)
Thecorrectanswerisnotgivenby(A),(B),(C)or(D).
16.X.BondsI.Residualclaim
Y.CommonstockII.Limitedliability
III.Maturitydate
17.X.CombinationbyformulaI.Equivalenttopurchasinganoption
Y.MultipleassetperformanceII.Assumesthattheimmunization
targetreturnexceedseitherthe
minimumreturnortheexpected
worstcaseactivereturn
III.Activemanagementproportionwill
varyinverselywiththeminimal
acceptablereturn
Course6:Spring2005-21-GOONTONEXTPAGE
MorningSession
18.X.ImmunizationstrategyI.Transactionsareafunctionof
volatilityandtime
Y.Total-returnstrategyII.Explicitlyconsidersreal-world
constraintssuchastaxeffects,
regulatoryrestrictionsandGAAP
accounting
III.Managermaytakeadvantageofa
perceivedchangeinvalueinthe
market
19.X.RainbowoptionsI.Knockoutoptions
Y.BarrieroptionsII.Basedonthemaximumorminimum
ofth*uesofseveralassets
III.Oftenariseaspartofastructured
security
20.X.SpreadanalysisI.Comparesthetotalreturnand
durationofvariousassets
Y.RelativereturnvalueanalysisII.Analyzespricesandyieldsbybond
marketsector
III.Usesregressiontodetermine
portfolioexpectations
Course6:Spring2005-22-GOONTONEXTPAGE
MorningSession
21-26.Questions21through26consistofanassertionintheleft-handcolumnandareasonin
theright-handcolumn.Codeyouranswertoeachquestionbyblackeningspace:
(A)Ifboththeassertionandthereasonaretruestatements,andthereasonisacorrect
explanationoftheassertion.
(B)Ifboththeassertionandthereasonaretruestatements,butthereasonisNOTa
correctexplanationoftheassertion.
(C)Iftheassertionisatruestatement,butthereasonisafalsestatement.
(D)Iftheassertionisafalsestatement,butthereasonisatruestatement.
(E)Ifboththeassertionandthereasonarefalsestatements.
21.
ASSERTION
Discountingthescheduledstream
ofcashflowsbytheforwardrates
providesthemarketvalueofa
callablebond.
BECAUSE
REASON
Forwardratescanbeusedto
determineth*ueofanystream
offixedcashflows.
22.
ASSERTION
Asinterestratesincrease,the
effectivedurationofacallable
bonddecreases.
BECAUSE
REASON
Effectivedurationrecognizesthe
factthatyieldchangesmay
changetheexpectedcashflows.
Course6:Spring2005-23-GOONTONEXTPAGE
MorningSession
23.
ASSERTION
Value-at-riskmodelshave
limitedabilitytocapturetherisks
ofexceptionalmarketevents.
BECAUSE
REASON
Value-at-riskmodelsuseaverage
historicalcorrelationsamongasset
pricestomakestatistical
assessments.
24.
ASSERTION
FASB87requiresbothpension
assetsandliabilitiestobemarked
tomarket.
BECAUSE
REASON
PriortoFASB87,anyunderfunding
ofapensionplanwas
reportedinthefootnotestothe
financialstatements.
25.
ASSERTION
Acallablebondhaspositive
convexity.
BECAUSE
REASON
Acallablebondmaybeviewedas
alongpositioninabondanda
longpositioninanoption.
26.
ASSERTION
AnArrow-Debreusecuritypays
oneunitinonestateofnatureand
nothinginallotherstates.
BECAUSE
REASON
Thesingle-periodsecurities
marketmodelisarbitragefreeif
andonlyifthereexistsastate
pricevector.
Course6:Spring2005-24-GOONTONEXTPAGE
MorningSession
27.Youaregiventhefollowing:
CountryExpectedOne-yearInvestmentReturn
U.S.4%
China6%
Thecurrentexchangerateis8.27ChineseRMBperU.S.Dollar.
Calculatetheno-arbitrageone-yearfutureexchangerate.
(A)8.11
(B)8.29
(C)8.43
(D)8.60
(E)8.77
Course6:Spring2005-25-GOONTONEXTPAGE
MorningSession
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Course6:Spring2005-26-GOONTONEXTPAGE
MorningSession
28.Youaregiventhefollowingforabinomialoptionpricingmodel:
?Lengthofinterval:4years
?Annualvolatility:0.5
?Annualinterestrate:5.0%
Calculatetheprobabilityvalueq.
(A)0.15
(B)0.36
(C)0.64
(D)0.68
(E)0.88
Course6:Spring2005-27-GOONTONEXTPAGE
MorningSession
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Course6:Spring2005-28-GOONTONEXTPAGE
MorningSession
29.Youaregiventhefollowing:
PortfolioMarketValueDuration
Assets1005.2
Liabilities854.4
Calculatethechangeineconomicsurplusifinterestratesdeclineby50basispoints.
(A)–1.5
(B)–0.7
(C)0.0
(D)0.7
(E)1.5
Course6:Spring2005-29-GOONTONEXTPAGE
MorningSession
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Course6:Spring2005-30-GOONTONEXTPAGE
MorningSession
30.Thetrackingerrorforaportfoliois50basispoints.Furtheranalysisshowsthatthe
trackingerrorforthesystematicriskis45basispoints.Calculatethetrackingerrorfor
theunsystematicrisk.
(A)2basispoints
(B)5basispoints
(C)14basispoints
(D)22basispoints
(E)25basispoints
Course6:Spring2005-31-GOONTONEXTPAGE
MorningSession
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Course6:Spring2005-32-GOONTONEXTPAGE
31-36.Eachofquestions31through36consistsoftwolists.Inthelistattheleftaretwoitems,
letteredXandY.Inthelistattherightarethreeitems,numberedI,IIandIII.ONEof
thelettereditemsisrelatedinsomewaytoEXACTLYTWOofthenumbereditems.
Indicatetherelateditemsusingthefollowinganswercode:
LetteredItem
IsRelatedtoNumberedItems
(A)
X
IandIIonly
(B)
X
IIandIIIonly
(C)
Y
IandIIonly
(D)
Y
IandIIIonly
(E)
Thecorrectanswerisnotgivenby(A),(B),(C)or(D).
31.X.RiskBasedCapitalI.Concentrationfactoradjustments
Y.MinimumContinuingCapital
SurplusRequirement
II.Assetfactorsfollowageometric
patternascreditdecreases
III.C-0risk
32.X.FreddieMacsecuritiesI.Freeofcreditrisk
Y.U.S.TreasurysecuritiesII.Intheprimarymarket,soldthrough
single-priceauction
III.Interestincomemaybesubjectto
stateandlocaltaxation
Course6:Spring2005-33-STOP
MorningSession
33.X.InterestratecorridorsI.Sometimesdescribedasswapping
intoabond
Y.InterestratecollarsII.Donotinvolvethesaleofafloor
III.Offerprotectionfrominterestrate
increasesatalowercostthanwith
thepurchaseofacap
34.X.InsuredassetallocationI.Requiresaninvestorrisktolerance
function
Y.TacticalassetallocationII.Requiresapredictionprocedure
III.Usuallyassumesthatexpected
returns,risks,andcorrelations
remainthesame
35.X.Interest-onlystripsI.Thepriceincreaseswheninterest
ratesdecline
Y.Principal-onlystripsII.Benefitfromslowingprepayments
III.Havepositiveduration
36.X.CAPMI.Systematicfactors
Y.SingleindexmodelII.Singleperiodplanners
III.Drasticallyreducesthenecessary
inputsintheMarkowitzportfolio
selectionprocedure
**ENDOFEXAMINATION**
MORNINGSESSION
Course6:Spring2005-34-GOONTONEXTPAGE
AfternoonSession
COURSE6
AFTERNOONSESSION
WRITTENANSWER
Course6:Spring2005-35-GOONTONEXTPAGE
AfternoonSession
**BEGINNINGOFEXAMINATION**
AFTERNOONSESSION
8.(4points)ListanddefinethedutiesofanERISAtrustee.Provideaspecificexampleof
aviolationofeachduty.
9.(4points)
(a)Compareinterestrateforwards,interestratefutures,interestrate
swaps,andinterestratecapsandfloorsintermsofthefollowing:
(i)Typesofmarkets
(ii)Liquidity
(iii)Contractform
(iv)Transactioncosts
(b)Explainhoweachofthefollowinginstrumentscanbe
usedtomanagetheinterestrateriskexposureofablockoffixed-rateannuities
currentlysupportedbyfloating-rateassets:
(i)Interestrateswaps
(ii)Interestratecapsandfloors
Course6:Spring2005-36-GOONTONEXTPAGE
AfternoonSession
10.(8points)Aninvestmenthousehasprovidedaninvestorwiththefollowing:
ScenarioProbabilityFundAReturnFundBReturn
150%25%20%
230%10%-20%
320%-30%25%
TheannualT-billreturnis3%.
(a)CalculatethecorrelationcoefficientbetweenFundAandFundBusingthegiven
scenarios.
(b)Determinetheoptimalriskyportfolio,PortfolioP.Calculatetheexpectedreturn
andstandarddeviationofPortfolioP.
(c)CalculatetheslopeoftheCapitalAllocationLinesupportedbyT-billsand
PortfolioP.
(d)Theinvestorhasthefollowingutilityfunction:
(U=Er)?0.025σ2
Calculatetheamounttheinvestorwouldinvestineachof:
(i)FundA
(ii)FundB
(iii)T-bills
(e)Anotherinvestmenthousehasdevelopedaportfolio,PortfolioQ,usingFundA
andFundB.TheexpectedreturnofPortfolioQis10%andthestandard
deviationis12%.ExplainiftheinvestorshouldinvestinPortfolioQratherthan
PortfolioP.
Showallwork.
Course6:Spring2005-37-GOONTONEXTPAGE
11.(5points)Withrespecttonumericalinterestrateriskmanagementtechniques,
(i)Listanddefinethecommontechniques
(ii)Describethekeyshortfallsofeachcommontechnique
BaseyouranswerontheCanadianInstituteofActuariesEducationalNote“Measurement
ofExposuretoInterestRateRisk”.
12.(6points)CompanyABChasaninternationalfundthatisbenchmarkedagainstan
externalindex.Youaregiventhefollowingwithrespecttoabenchmarkportfolioand
ABC’sfundmanager’sportfolio:
Market
Benchmark
Weight
Returnon
EquityIndex
Currency
Appreciation
FundManager’s
Weight
FundManager’s
EquityReturn
Asian40%10%20%35%12%
European25%5%-10%7%
Australian35%7%25%20%
(a)Describetherisksthatareuniquetointernationalinvestments.
(b)Thefundmanager’sportfolioreturnmatchedthereturnoftheindex.Determine
theamountthatthefundmanagerinvestedintheEuropeanandAustralian
markets.
(c)Foryourportfolio,calculatetheindividualimpactsofeachofthefollowing:
(i)Currencyselection
(ii)Countryselection
(iii)Stockselection
Showallwork.
Course6:Spring2005-38-GOONTONEXTPAGE
AfternoonSession
13.(5points)Youaregiventhefollowingwithrespecttoan8-year,6%,sequential-pay
CMO:
TrancheInitialBalance
120,000
235,000
365,000
?TheannualpaymentrequiredtoamortizetheCMOovereightyearsis19,324.31.
?Theactualcashflowsareasfollows:
Year
Interest
Payment
RequiredPrincipal
Payment
Additional
PrincipalPayment
Outstanding
Balance
0120,000.00
17,200.0012,124.311,078.76106,796.93
26,407.8112,916.501,877.6192,002.82
35,520.1713,804.142,345.9675,852.72
44,551.1614,773.152,443.1858,636.39
53,518.1815,806.132,141.5140,688.75
62,441.3216,882.991,190.2922,615.47
71,356.9217,967.39185.924,462.16
8267.734,462.160.000.00
(a)DescribethetypesofCMOstructures.
(b)Calculatetheoutstandingbalanceforeachtrancheattheendofeachyear.
(c)Calculatetheinterestallocatedtoeachtrancheforeachofthefirstthreeyears.
Showallwork.
Course6:Spring2005-39-STOP
AfternoonSession
14.(4points)
(a)Describethecriteriaforselectinganinterestrategenerator.
(b)Describethecharacteristicsof
(i)alognormalprocess
(ii)ameanreversionarylognormalprocess
(c)DescribethestepsusedintheMarkovchainprocesstogenerateinterestrates.
15.(4points)
(a)Describetheadvantagesanddisadvantagesofusingstochasticsimulationwhen
pricingderivativesecurities.
(b)DescribethetechniquesthatareavailabletoreducevariancewhenusingMonte
Carlosimulation.
**ENDOFEXAMINATION**
高顿网校小编提醒您，把握好精算师的考试题型，才能在考试中合理分配时间，祝各位考生考试成功。
