Questions from Financial Management

Q: Investigate what happens as the width of the mezzanine tranche of the

Investigate what happens as the width of the mezzanine tranche of the ABS in Figure 6.4 is decreased, with the reduction in the mezzanine tranche principal being divided equally between the equity and...

Q: The gamma and vega of a delta-neutral portfolio are 50

The gamma and vega of a delta-neutral portfolio are 50 per $ per $ and 25 per %, respectively. Estimate what happens to the value of the portfolio when there is a shock to the market causing the under...

Q: Prove (a) that the definitions of duration in equations (

Prove (a) that the definitions of duration in equations (9.1) and (9.3) are the same when y is continuously compounded and (b) that when y is compounded m times per year they are the same if the right...

Q: Suppose that daily changes for a portfolio have first-order autocorrelation

Suppose that daily changes for a portfolio have first-order autocorrelation with autocorrelation parameter 0.12. The 10-day VaR, calculated by multiplying the one-day VaR by, is $2 million. What is a...

Q: Suppose that we back-test a VaR model using 1,

Suppose that we back-test a VaR model using 1,000 days of data. The VaR confidence level is 99% and we observe 15 exceptions. Should we reject the model at the 5% confidence level? Use Kupiec’s two-ta...

Q: “Some aspects of the new regulations can be expected to increase

“Some aspects of the new regulations can be expected to increase the amount of collateral posted for derivatives and some can be expected to reduce it.” Explain this statement.

Q: A hedge fund charges 2 plus 20%. A pension fund invests

A hedge fund charges 2 plus 20%. A pension fund invests in the hedge fund. Plot the return to the pension fund as a function of the return to the hedge fund.

Q: Suppose that the spread between the yield on a three-year

Suppose that the spread between the yield on a three-year riskless zero-coupon bond and a three-year zero-coupon bond issued by a bank is 210 basis points. The Black–Scholes–Merton price of an option...

Q: Suppose that a bank has a total of $10 million of

Suppose that a bank has a total of $10 million of small exposures of a certain type. The one-year probability of default is 1% and the recovery rate averages 40%. Estimate the 99.5% one-year credit Va...

Q: What position is equivalent to a long forward contract to buy an

What position is equivalent to a long forward contract to buy an asset at K on a certain date and a long position in a European put option to sell it for K on that date?