I'm still not convinced on this one. A stock price decline would mean the delta hedge needs to be rebalanced. Since the hedge is short the stock vs long delta on the CB, they would need to buy stock to rebalance. This would be a cash outflow. However I don't recall whether the question specified...
Few that I can remember that had me puzzled were:
1. MCS for MBS. I chose path dependence, but there was also an answer regarding calculating zero volatility option adjusted spread. However OAS would be zero under zero vol, possibly typo?
2. LVAR - greatest constant spread LC for various...
Hi troubleshooter,
I'd come across this in the Test bank questions from the Handbook. Is there a foolproof way of telling which method the the question is expecting to be used?
Quick estimate: spread = LGD * PD
Long real-world: FV/(1+y) = FV *(1-PD)/(1+Rf) + FV*(1-LGD)*PD/(1+Rf)
which...
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