550_445_2010 TA 01

# 550_445_2010 TA 01 - 550.445 Modeling and Analysis of...

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Unformatted text preview: 550.445 Modeling and Analysis of Securities and Financial Markets II, Spring 2010 TA Section 01 Peter C.L. Lin [email protected] 1 What will you learn in 445? We will focus on two main topics: (1) Interest Rate Models, and (2) Credit Derivatives. The math in this course is more di ffi cult than 444, especially in discussing about interest rate models. I will go through some proofs in details so you can better understand the materials. 2 Homework Review 27.15 Suppose that S is the security price and μ is the expected return from the security. Then dS S = μ dt + σ 1 dz 1 + σ 2 dz 2 where dz 1 and dz 2 are Wiener processes, σ 1 dz 1 is the component of the risk in the return attributable to the price of copper and σ 2 dz 2 is the component of the risk in the return attributable to the yen-dollar exchange rate. If the price of copper is held fixed, dz 1 = 0 and: dS S = μ dt + σ 2 dz 2 . Hence σ 2 is 8% per annum or 0 . 08. If the yen-dollar exchange rate is held fixed, dz 2 = 0 and: dS S = μ dt + σ 1 dz 1 . Hence σ 1 is 12% per annum or 0 . 12....
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550_445_2010 TA 01 - 550.445 Modeling and Analysis of...

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