Questions from Business Statistics

Q: Explain how you would value a derivative that pays off 100R in

Explain how you would value a derivative that pays off 100R in 5 years, where R is the 1-year interest rate (annually compounded) observed in 4 years. What difference would it make if the payoff were...

Q: Suppose that in Example 29.3 of Section 29.2

Suppose that in Example 29.3 of Section 29.2 the payoff occurs after 1 year (i.e., when the interest rate is observed) rather than in 15 months. What difference does this make to the inputs to Black’s...

Q: The OIS zero curve is flat at 10% per annum with

The OIS zero curve is flat at 10% per annum with annual compounding. Calculate the value of an instrument where, in 5 years’ time, the 2-year swap rate (with annual compounding) is received and a fixe...

Q: What difference does it make in Problem 30.4 if the

What difference does it make in Problem 30.4 if the swap rate is observed in 5 years, but the exchange of payments takes place in (a) 6 years, and (b) 7 years? Assume that the volatilities of all f...

Q: The price of a bond at time T, measured in terms

The price of a bond at time T, measured in terms of its yield, is . Assume geometric Brownian motion for the forward bond yield y in a world that is defined by a numeraire equal to a bond maturing at...

Q: The variable S is an investment asset providing income at rate q

The variable S is an investment asset providing income at rate q measured in currency A. It follows the process
in the real world. Defining new variables as necessary, give the process followed by S,...

Q: A call option provides a payoff at time T of
yen

A call option provides a payoff at time T of
yen, where
is the dollar price of gold at time T and K is the strike price. Assuming that the storage costs of gold are zero and defining other variabl...

Q: Estimate the interest rate paid by P&G on the 5

Estimate the interest rate paid by P&G on the 5/30 swap in Section 34.7 if (a) the CP rate is 6.5% and the Treasury yield curve is flat at 6% and (b) the CP rate is 7.5% and the Treasury yield curve i...

Q: A Canadian equity index is 400. The Canadian dollar is currently

A Canadian equity index is 400. The Canadian dollar is currently worth 0.70 U.S. dollars. The risk-free interest rates in Canada and the U.S. are constant at 6% and 4%, respectively. The dividend yiel...

Q: Suppose that the short rate is currently 4% and its standard

Suppose that the short rate is currently 4% and its standard deviation in a short period of time t is 0.01
.. What happens to this standard deviation when the short rate increases to 8% in (a) Vasice...