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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
MorningSession
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.
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
MorningSession
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
THISPAGEINTENTIONALLYLEFTBLANK
Course6:Spring2005-14-GOONTONEXTPAGE
MorningSession
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
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
MorningSession
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
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
AfternoonSession
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**
以上则是请认真答题，珍惜小编的辛勤劳作，珍惜美好的学习时光。
高顿网校之名人警句：友谊！世界上有多少人在说这个字的时候指的是茶余酒后愉快的谈话和相互间对弱点的宽容！可是这跟友谊有什么关系呢。 —— 法捷耶夫
