Exam Feedback November 2019 Part 1 Exam Feedback

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nrustamli

New Member
Thank you, that problem still haunts me.

I remember the question exactly if anyone else is up for trying it now. 6 month, 1-step binomial, European Put. (Question #45 in the Red Book) Index is 3300, will either go up 5% in 6 months, or down 10%. Strike of put is 3200. What is put worth? I think Rf=2%.

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
 

Sixcarbs

Active Member
Ok, next up, if anyone is game. I think this was question #11 in the red book.

BSM price for the following put.

Rf= 4%
Stock price = $54
Strike = $50
Time to Maturity= 9 months
Dividend= 6$, to be paid in 6 months
N(d1) and N(d2), both adjusted for dividends were given. Can't remember the exact numbers now. I believe for the put calculation we need N(-d2) and N(-d1).

This problem burned up way too much of my time. Anyone want to take a stab at this?

I think the basic formula is:

[Ke^(-q*t)]*[N(-d2)]-[S*N(-d1)]

But I also think the Present Value of the dividend needs to be inserted in there once or twice. My gut told me it should be subtracted from S. But I could not come close to any of the choices.
 

randrema

New Member
Ok, next up, if anyone is game. I think this was question #11 in the red book.

BSM price for the following put.

Rf= 4%
Stock price = $54
Strike = $50
Time to Maturity= 9 months
Dividend= 6$, to be paid in 6 months
N(d1) and N(d2), both adjusted for dividends were given. Can't remember the exact numbers now. I believe for the put calculation we need N(-d2) and N(-d1).

This problem burned up way too much of my time. Anyone want to take a stab at this?

I think the basic formula is:

[Ke^(-q*t)]*[N(-d2)]-[S*N(-d1)]

But I also think the Present Value of the dividend needs to be inserted in there once or twice. My gut told me it should be subtracted from S. But I could not come close to any of the choices.

[Ke^(-Rf*t)]*[N(-d2)]-[(S-PV(Dividend))*N(-d1)]

That is what I would have done. Only the stock price is impacted by the dividend. Since the dividend is not a Yield, its PV should be substracted to the Stock price. Or you have to calculate the equivalent Yield and in this case, the formula become : [Ke^(-Rf*t)]*[N(-d2)]-[S*N(-d1)*e^(-q*t)]
 

nrustamli

New Member
1. One question was on the covariance stationary time series. I marked the answer which said that variance remains constant.
2. Monte Carlo simulation: I guess the answer was 45000.
3. Confidence Level<-> Economic Capital...? Does anyone remember this?
4. t-test..? I marked t-test>critical value..hence reject..I don't know if this is correct as I had to guess this one with a few seconds remaining.
5. Bond rating downgrade...Non-investment grade/investment grade and stock market relation...Anyone?
6. Variation Margin one ...the answer was 0, I think.
7. Risk Data aggregation/reporting...Finance division something?
8. One question was on crack-spread..
9. CAPM assumptions: Lending and borrowing at the same rate; investors' expectations same.....??

@Fisuca, I remember marking 40% too...

1. Yes, I think my answer was either "variance is finite" or "variance is constant and finite"
2. Yes, 45000

5. I vaguely remember also selecting that option
6. I selected something around 100k, but we might have different booklets

8. On the crack spread question the spread was definitely 3-2-1, there was a table with two columns of future prices, one with December the other with February futures, I used December column for oil future price, February column for the gasoline and the other stuff
 

qasimshaukat

New Member
There was a question that asked for sample mean. It seamed straightforward but the trick was it was based on a SAMPLE not the POPULATION so it had to be the sum divided by N-1. Does anyone remember that?
 

Detective

Active Member
There was a question that asked for sample mean. It seamed straightforward but the trick was it was based on a SAMPLE not the POPULATION so it had to be the sum divided by N-1. Does anyone remember that?

Sample mean is an unbiased estimator for the population mean, so you divide by N and not N-1. Was the question perhaps about sample variance or sample standard deviation?
 

qasimshaukat

New Member
Sample mean is an unbiased estimator for the population mean, so you divide by N and not N-1. Was the question perhaps about sample variance or sample standard deviation?
No it would be n-1 to correct its unbiased nature.

"In statistics, Bessel's correction is the use of n − 1 instead of n in the formula for the sample variance and sample standard deviation,[1] where n is the number of observations in a sample. This method corrects the bias in the estimation of the population variance. It also partially corrects the bias in the estimation of the population standard deviation."

I think it was just the mean they were looking for.
 

randrema

New Member
Also, there was a question about CEO being offered a bonus, either he can take the lump sum at the end of the first year or he can take it in 2 cashflows, 1st one after 6 months and remaining at the end of the year, I calculated 3-4 times but couldn't get the answer for this.
The same! I spent too much time on it. I did not want to give up as I told myself this is very very straightforward question. But no, I could not get the answer too. I really think there is may be an error in that question.
 

qasimshaukat

New Member
The same! I spent too much time on it. I did not want to give up as I told myself this is very very straightforward question. But no, I could not get the answer too. I really think there is may be an error in that question.
I think we had to calculate the pay using continuous compounding. I got the answer.
 

randrema

New Member
Maybe you discounted the entire amount instead of half of the amount and the other half separately? And did you divide the rate by 2? You should've had the answer.

I did:

350 * exp(-Rf*0.5) + 350 * exp(-Rf*1)

and

700 * exp(-Rf*1)

I did not divided Rf by two as it's a continuously compounding.

I dont know, may be instead of 700 I wrote 750 or something else silly...
 

qasimshaukat

New Member
I did:

350 * exp(-Rf*0.5) + 350 * exp(-Rf*1)

and

700 * exp(-Rf*1)

I did not divided Rf by two as it's a continuously compounding.

I dont know, may be instead of 700 I wrote 750 or something else silly...
Yeah thats correct. Weird how you didnt get the answer through this. This is exactly what I did
 

nrustamli

New Member
I did:

350 * exp(-Rf*0.5) + 350 * exp(-Rf*1)

and

700 * exp(-Rf*1)

I did not divided Rf by two as it's a continuously compounding.

I dont know, may be instead of 700 I wrote 750 or something else silly...

Funny that I also used 750 at first instead of 700, then corrected it and got the answer
 
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