Questions from Business Statistics

Q: Distinguish between the historical data and the risk-neutral approach to

Distinguish between the historical data and the risk-neutral approach to valuing a derivative. Under what circumstance do they give the same answer?

Q: Suppose that you have 50 years of temperature data at your disposal

Suppose that you have 50 years of temperature data at your disposal. Explain carefully the analyses you would carry out to value a forward contract on the cumulative CDD for a particular month.

Q: Explain the difference between the net present value approach and the risk

Explain the difference between the net present value approach and the risk-neutral valuation approach for valuing a new capital investment opportunity. What are the advantages of the risk-neutral valu...

Q: Suppose that the payoff from a derivative will occur in 10

Suppose that the payoff from a derivative will occur in 10 years and will equal the 3-year U.S. dollar swap rate for a semiannual-pay swap observed at that time applied to a certain principal. Assume...

Q: The market price of risk for copper is 0.5,

The market price of risk for copper is 0.5, the volatility of copper prices is 20% per annum, the spot price is 80 cents per pound, and the 6-month futures price is 75 cents per pound. What is the exp...

Q: Show that if y is a commodity’s convenience yield and u is

Show that if y is a commodity’s convenience yield and u is its storage cost, the commodity’s growth rate in the traditional risk-neutral world is r − y + u, where r is the risk-free rate. Deduce the r...

Q: A driver entering into a car lease agreement can obtain the right

A driver entering into a car lease agreement can obtain the right to buy the car in 4 years for $10,000. The current value of the car is $30,000. The value of the car, S, is expected to follow the pro...

Q: Describe how netting works. A bank already has one transaction with

Describe how netting works. A bank already has one transaction with a counterparty on its books. Explain why a new transaction by a bank with a counterparty can have the effect of increasing or reduci...

Q: ‘‘DVA can improve the bottom line when a bank is experiencing

‘‘DVA can improve the bottom line when a bank is experiencing financial difficulties.’’ Explain why this statement is true.

Q: Suppose that the daily volatilities of asset A and asset B,

Suppose that the daily volatilities of asset A and asset B, calculated at the close of trading yesterday, are 1.6% and 2.5%, respectively. The prices of the assets at close of trading yesterday were $...