Exam Feedback November 2019 Part 1 Exam Feedback

[P Bhattacharya]

Same with me.. Thought the same way

For me also its butterfly spread

 

[randrema]

even my answer was butterfly spread since according to me the question specified trader expected limited volatility therefor strangle or straddle doesn't make sense

I remember the question said price is expected to go 40% under price 1 or 40% above price 2. I consider these 2 prices as 2 strikes. I consider also 40% is a substantial move. That's why I chose strangle.

 

[stevoDE]

I remember the question said price is expected to go 40% under price 1 or 40% above price 2. I consider these 2 prices as 2 strikes. I consider also 40% is a substantial move. That's why I chose strangle.

Yip, maximise profit for 40% move up or down and minimise losses if it stayed in 20% range or something along those lines. I chose butterfly spread but strangle is the correct answer.

 

[Venkat k]

Same with me.. Thought the same way

My answer also butterfly only

 

[Venkat k]

I think you remember correctly, this is how I did it:

First up probability:

[e^(2/1)-0.9]/[1.05-0.9] =73.4%

So probability down is 26.6%

Up move step is 3200*1.05=3369

Down step 2970

The value of up move step is 0*73.4%=0

The value of down move is (3200-2970)*26.6%=230*26.6%=61.18

So total value is 61.18 and when you find PV using cont discounting it is 60.6

I have doubt in down move factor we should not take as. 90 as down move. We should take. 95.
3300×1.05= 3465

3300 3465×.95 =3300
3135×1.05=3300

3300×.95=3135

and my guess is since this is futures index risk neutral probability should take 1.

and the present value of (3200-3135=65) is 64.XX.which is option c. It is logical guess only.

 

[Fisuca]

I remember the question said price is expected to go 40% under price 1 or 40% above price 2. I consider these 2 prices as 2 strikes. I consider also 40% is a substantial move. That's why I chose strangle.

Exactly the same. Only strangle was volatility long...

 

[Fisuca]

I have doubt in down move factor we should not take as. 90 as down move. We should take. 95.
3300×1.05= 3465

3300 3465×.95 =3300
3135×1.05=3300

3300×.95=3135

and my guess is since this is futures index risk neutral probability should take 1.

and the present value of (3200-3135=65) is 64.XX.which is option c. It is logical guess only.

Why should a future Index have a risk neutral prob of one ? The risk neutral Probability is a change in the Probability measure such that you can discount the expected option value with the risk free rate and is derived from the up and down factor..

 

[Fisuca]

Why should a future Index have a risk neutral prob of one ? The risk neutral Probability is a change in the Probability measure such that you are able to discount the expected option value with the risk free rate and is derived from the up and down factor..

 

[randrema]

I have doubt in down move factor we should not take as. 90 as down move. We should take. 95.
3300×1.05= 3465

3300 3465×.95 =3300
3135×1.05=3300

3300×.95=3135

and my guess is since this is futures index risk neutral probability should take 1.

and the present value of (3200-3135=65) is 64.XX.which is option c. It is logical guess only.

Was the binomial question related to a future but not stock?
The risk neutral probability up should that case equal to (1 - D)/(U - D).
I was trapped by the stress alhough I know it.
This exam was really tricky.

 

[Fisuca]

Was the binomial question related to a future but not stock?
The risk neutral probability up should that case equal to (1 - D)/(U - D).
I was trapped by the stress alhough I know it.
This exam was really tricky.

P_up=e(r* Delta t)-d /(u-d)

 

[Venkat k]

Was the binomial question related to a future but not stock?
The risk neutral probability up should that case equal to (1 - D)/(U - D).
I was trapped by the stress alhough I know it.
This exam was really tricky.

Yes i guess given data was about futures index.

 

[randrema]

P_up=e(r* Delta t)-d /(u-d)

In the swcheser notes : « The binomial model can also incorporate the unique characteristics of options on futures. Since futures contracts are costless to enter into, they are considered, in a risk-neutral setting, to be zero growth instruments. To account for this characteristic, ert is simply replaced with a 1. »

 

[yz1300]

does anyone remember that there is a question about moral hazard or adverse selection? Which one did you take?

 

[randrema]

does anyone remember that there is a question about moral hazard or adverse selection? Which one did you take?

As I remember it asked the disadvantages of ccp, especially when a party has the less incentive to monitor the risk of another party because of the ccp taking the risk. I answered moral hazard

 

[Venkat k]

As I remember it asked the disadvantages of ccp, especially when a party has the less incentive to monitor the risk of another party because of the ccp taking the risk. I answered moral hazard

Yes moral hazard only

 

[yz1300]

As I remember it asked the disadvantages of ccp, especially when a party has the less incentive to monitor the risk of another party because of the ccp taking the risk. I answered moral hazard

Yes moral hazard only

yes I chose moral hazard too

 

[Venkat k]

And two questions asked about long term variance can anyone remember...

 

[Venkat k]

One is long term variance from maximum likely wood approach
And long term variance based on implied volatility.

 

[Venkat k]

Sorry max likelihood approach

 

[Fisuca]

In the swcheser notes : « The binomial model can also incorporate the unique characteristics of options on futures. Since futures contracts are costless to enter into, they are considered, in a risk-neutral setting, to be zero growth instruments. To account for this characteristic, ert is simply replaced with a 1. »

Oh it was a future? I remeber it being a Stock underlying (blue book)