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I am a bit curious to know whether jensen's alpha has any relation to the error term in the security characteristic line? Security characteristic line regresses (Ri-Rf) against (Rm-Rf). In this case, if i regress, then (Ri-Rf) = α + β(Rm-Rf) + ei then, Ri= α + [Rf + β(Rm-Rf)] + ei then, Ri =...

Hi @Kaiser , Linearity in regression actually means B0, B2 etc (i.e the parameters) be linear. The variables may or may not be non linear as we can convert them to make a linear equation in variables

Hi Brian, The linearity that you are thing like 3^2 = 9 if 9 is the beta, that way to think is totally incorrect. basically, if u break down the Beta, it is Σ(x- xbar) (y-bar) / Σ(x-xbar)^2 This is in the form of Σ α (y-ybar) where α is just a number, or we can say weights of an observation...

yep, that has to be a typo

Hi Jayanthi, What he did is basically the same thing you did, exp(0.2) is the up move factor and exp(-0.2)is the down move. You must have got this from Hull. However, as David said, it is delta hedge for one step only. If we do this hedging continiously, we will be close to our black scholes...

Just thought I would like to share how you actually loose money regardless of the direction of the underlying when you are short gamma (or convexity) by shorting an option. ∆a be the underlying shares (or bonds whatever) we know convexity as ∆a+ 1/2 Г a^2 Thus, our net position will be ∆a -...

Thanks David, After reading the stuff many times from tuckman i got it. You can explain why did we go for the equations (due to the mismatch of hedges of the 5 year with the 30 year),what are the values actually calculated in the table, why others are 0 values (bonds trading at par of the same...

Hi David, It would have been useful if u would have provided a bit of depth in explaining this topic. I tried reading tuckman too, went over my head.

thanks David for the excel sheet, i feel better now :cool:, and how the particular 30th year cash flow value actually increases the value of the bond, your excel sheet together with tuckmans curve figure made me understand. thanks again! :D

Thanks, been hours since this thing is bugging in my head, hope to calm myself now :p:D

David there wrote he will upload the spreadsheets in the paid members Q&A, so i was looking for that. I have actually not subscribed to the spreadsheets but i thought this one was for all, sorry!

Are the spreadsheets available?

Tuckman writes, 'Turning now to interpreting the results, the key-rate profile in Table 5.2 shows that the interest rate exposure of the 30-year C-STRIPS is equivalent to that of a long position in a 30-year par bond, a smaller, short position in a 10-year par bond, and even smaller short...

For derivatives, I dont know why but I found Sundaram, Das book to be more effective and intuitive than John C Hull.

Hi @DebbieM , so how did you manage? (I know from a post that u cleared part 1) Since you are from India, I am even keen to know the same. Thing is, I was doing CA and the current job i do (related to audit) has no role in FRM, i am perplexed at this point.

My bad, so it was options on the bond, i got it

Tuckman says that if we write an option, and the interest rates fall, then there will be loss to the option writer and gain to the option holder. But, rho (greeks) states otherwise, it says that call option holder gains if there is increase in the interest rates. I am confused here?