Questions from Business Statistics

Q: Verify that the DerivaGem software gives Figure 32.9 for the

Verify that the DerivaGem software gives Figure 32.9 for the example considered. Use the software to calculate the price of the American bond option for the lognormal and normal models when the strike...

Q: In the flexi cap considered in Section 33.2 the holder

In the flexi cap considered in Section 33.2 the holder is obligated to exercise the first N in-the-money caplets. After that no further caplets can be exercised. (In the example, N = 5.) Two other way...

Q: Suppose that you are trading a LIBOR-in-arrears swap

Suppose that you are trading a LIBOR-in-arrears swap with an unsophisticated counterparty who does not make convexity adjustments. To take advantage of the situation, should you be paying fixed or rec...

Q: Suppose that all 12-month LIBOR forward rates are 5%

Suppose that all 12-month LIBOR forward rates are 5% with annual compounding. The OIS zero curve is flat at 4.8% with continuous compounding. In a 5-year swap, company X pays a fixed rate of 6% and re...

Q: A company uses the GARCH(1,1) model for

A company uses the GARCH(1,1) model for updating volatility. The three parameters are
,
, and
. Describe the impact of making a small increase in each of the parameters while keeping the others f...

Q: How would you calculate the initial value of the equity swap in

How would you calculate the initial value of the equity swap in Business Snapshot 34.3 if OIS discounting were used?

Q: An insurance company’s losses of a particular type are to a reasonable

An insurance company’s losses of a particular type are to a reasonable approximation normally distributed with a mean of $150 million and a standard deviation of $50 million. (Assume no difference bet...

Q: How is the tree in Figure 35.2 modified if the

How is the tree in Figure 35.2 modified if the 1- and 2-year futures prices are $21 and $22 instead of $22 and $23, respectively. How does this affect the value of the American option in Example 35.3....

Q: In the example considered in Section 36.5: (

In the example considered in Section 36.5: (a) What is the value of the abandonment option if it costs $3 million rather than zero? (b) What is the value of the expansion option if it costs $5 million...

Q: An oil company is set up solely for the purpose of exploring

An oil company is set up solely for the purpose of exploring for oil in a certain small area of Texas. Its value depends primarily on two stochastic variables: the price of oil and the quantity of pro...