ADMS4504-Assignment2-Sample2

ADMS4504-Assignment2-Sample2 - AP/ADMS4504 Assignment #2...

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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 Price-based vs. yield-based 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 3-day 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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AP/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 priced-based volatility and yield-based volatility in the context of fixed-income securities. Briefly qualitatively explain how you would calculate the price-based volatility of a bond. Next, briefly describe qualitatively how you would use the procedures for calculating the priced-based volatility to compute the yield-based volatility of the same bond. Please write down the necessary formulas. (7 marks) Question 2 Binomial model and option-adjusted spread (OAS) (21 marks)
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ADMS4504-Assignment2-Sample2 - AP/ADMS4504 Assignment #2...

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