AP/ADMS4504
Assignment #2
Winter 2010
Instructions:
(1)
This assignment is to be done individually.
You must sign and submit
the standard cover page supplied as the last page of this
assignment
.
(2)
Before you start, please read the note “
Writing Style Required for
AP/ADMS4504 Assignments
” posted in the “Assignments” folder on the
course web site. Please stick to the writing guidelines suggested in the
note.
(3)
This assignment is due at the
start
of class
in the
week beginning
March 30, 2010
.
(4)
This assignment is to be either handwritten or printed out.
Work that is too
difficult to read due to messiness and poor handwriting will receive zero
credit.
You must show your work to receive full credit.
(5)
Late assignments will not be accepted whether for technical or any other
reason.
(6)
Decimal places: unless otherwise stated please keep at least 4 in your
calculations and at least 2 in your final answers.
Question 1
Pricebased vs. yieldbased volatility (16 marks)
This question has two independent parts, (a) and (b).
(a) Use the daily yields in the following table (
see next page
) to compute a daily
standard deviation of yields. Next annualize the daily standard deviation just
calculated first using 365 calendar days, then using 250 trading days in a year.
Finally, construct a 3day moving average equal weight volatility forecast for each
day in the period from Day 4 to Day 16, assuming that the expected value of the
daily change in yield is zero.
Please note
: for this question 1) you may attach
your Excel worksheet to your assignment, 2) please write down clearly the
formulas used, and 3) keep at least 6 decimal places in both your calculations
and your final answers.
(9 marks)
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View Full DocumentAP/ADMS4504 Winter 2010
Assignment #2
Day
Yield (%)
0
3.750
1
3.752
2
3.749
3
3.746
4
3.744
5
3.748
6
3.751
7
3.752
8
3.750
9
3.751
10
3.747
11
3.746
12
3.749
13
3.748
14
3.751
15
3.753
16
3.754
(b) It is useful to distinguish between pricedbased volatility and yieldbased
volatility in the context of fixedincome securities. Briefly qualitatively explain how
you would calculate the pricebased volatility of a bond. Next, briefly describe
qualitatively how you would use the procedures for calculating the pricedbased
volatility to compute the yieldbased volatility of the same bond. Please write
down the necessary formulas.
(7 marks)
Question 2
Binomial model and optionadjusted spread (OAS) (21 marks)
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 Fall '10
 Nabil
 Zerocoupon bond, Credit default swap

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