solutions - INTRODUCTION TO THE ECONOMICS AND MATHEMATICS...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: INTRODUCTION TO THE ECONOMICS AND MATHEMATICS OF FINANCIAL MARKETS; STUDENT’S MANUAL Jakˇ sa Cvitani´ c and Fernando Zapatero September 2003 Table of Contents INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. FINANCIAL MARKETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2. INTEREST RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3. MODELS OF SECURITIES PRICES IN FINANCIAL MARKETS . . . . . . . . 7 4. OPTIMAL CONSUMPTION/PORTFOLIO STRATEGIES . . . . . . . . . . . . . . . . 12 5. RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 6. ARBITRAGE AND RISK-NEUTRAL PRICING . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7. OPTION PRICING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8. FIXED INCOME MARKET MODELS AND DERIVATIVES . . . . . . . . . . . . . 35 9. HEDGING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 10. BOND HEDGING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 11. NUMERICAL METHODS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 12. EQUILIBRIUM FUNDAMENTALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 13. CAPM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 INTRODUCTION This manual contains the solutions to the end-of-the chapters problems in Introduction to the Economics and Mathematics of Financial Markets (MIT Press, 2003), that have a † sign, as in † 14 , when problem 14 is solved in the manual. For some problems for which the main part consists of writing a computer program and doing computations, we only give suggestions and not full solutions. For these, the book web page http://math.usc.edu/ ∼ cvitanic/book.html contains Microsoft Excel files that can be helpful. The files have names like “ch1.xls”. That particular file has all the figures from Chapter 1 of the book, and all the computations needed to produce them. We use only basic features of Excel, except for Monte Carlo simulation for which we use the Visual Basic programming language, incorporated in Excel. At a few places in the book we do give “Excel Tips” that point out what trickier commands have been used. Other, more mathematically oriented software may be more efficient for longer computations such as Monte Carlo simulation, and we leave the choice of the software to be...
View Full Document

This note was uploaded on 11/12/2009 for the course ECON hag taught by Professor Gunnar during the Fall '09 term at Uni. Iceland.

Page1 / 53

solutions - INTRODUCTION TO THE ECONOMICS AND MATHEMATICS...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online