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MidtermTwo_Fall2009

# MidtermTwo_Fall2009 - ACTUARIAL SCIENCE 445/845 Asset...

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ACTUARIAL SCIENCE 445/845: Asset Liability Management Midterm One - Fall 2009 Aids: Calculator, Answer all questions in the space provided. Show your work. Name: ____________________ Marks: _____________________/35 ID#: _____________________ Course (445 or 845):___________ Concept Questions 1. [5 marks] Briefly explain what the option adjusted spread of an interest rate derivative security is, and describe how it is used to calculate effective duration. 2. a) [1 mark] Give the stochastic differential equation for the Vasicek interest rate model. b) [2 marks] Briefly explain what is meant when it said that the Vasicek model of interest rates is not an arbitrage free term structure model. c) [2 marks] Briefly explain what is meant when it is said that the model exhibits mean reversion of the short rate.

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Problems: 3. a) [8 marks] The returns on stocks A and B have a bivariate normal distribution. Stock A has expected return μ A and standard deviation σ A > 0, while stock B has expected return μ B and standard deviation σ B > 0. You invest w A > 0 dollars in stock A and w B > 0 dollars in stock B . Let VaR A
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MidtermTwo_Fall2009 - ACTUARIAL SCIENCE 445/845 Asset...

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