Student Solution Manual
to accompany the textbook
Fixed Income Securities:
Valuation, Risk, and Risk Management
by Pietro Veronesi
Authors:
Francisco Javier Madrid
Anna Cieslak
Francesco Benintende
Version 1.3
Date: March 02, 2011
This student solution ma
Dependent Variable: GE
Method: Least Squares
Date: 11/04/16 Time: 12:26
Sample: 2010Q1 2016Q3
Included observations: 27
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
CO
GDP
CPI
I
-38.34455
-1.100696
0.003470
0.065847
0.091933
28.61061
0.550321
0.001
Pairwise Granger Causality Tests
Date: 11/04/16 Time: 12:45
Sample: 2010Q1 2016Q3
Lags: 2
Null Hypothesis:
Obs
F-Statistic
Prob.
GE does not Granger Cause GDP
GDP does not Granger Cause GE
25
2.59223
4.68290
0.0998
0.0215
CO does not Granger Cause GDP
GDP
Correlation
GDP
GE
CO
I
CPI
GDP
GE
CO
I
CPI
1.000000
0.922352
0.078737
-0.612790
0.957392
0.922352
1.000000
-0.080429
-0.539777
0.897124
0.078737
-0.080429
1.000000
-0.058010
0.051035
-0.612790
-0.539777
-0.058010
1.000000
-0.455597
0.957392
0.897124
0.05
Covariance
GDP
GE
CO
I
CPI
GDP
GE
CO
I
CPI
1414280.
5302.142
62.29122
-699.0077
8009.008
5302.142
23.36542
-0.258630
-2.502670
30.50427
62.29122
-0.258630
0.442543
-0.037016
0.238817
-699.0077
-2.502670
-0.037016
0.920038
-3.074010
8009.008
30.50427
0.238
Ramsey RESET Test
Equation: UNTITLED
Specification: GE GDP CO I CPI
Omitted Variables: Squares of fitted values
t-statistic
F-statistic
Likelihood ratio
F-test summary:
Test SSR
Restricted SSR
Unrestricted SSR
LR test summary:
Restricted LogL
Unrestricted
Johansen Cointegration Test
Date: 11/04/16 Time: 12:52
Sample (adjusted): 2010Q3 2016Q3
Included observations: 25 after adjustments
Trend assumption: Linear deterministic trend
Series: GDP GE CO I CPI
Lags interval (in first differences): 1 to 1
Unrestric
EXAM PREPERATION
Derivatives (BU7508)
Class 5
17 November 2016
Dr. Shaen Corbet
Trinity College Dublin
IMPORTANT NOTE
Assignment is due this coming Friday (18 November @ 5pm)
A copy must be emailed to me at shaen.corbet@dcu.ie or the submission is not
com
BU7508-1
Faculty of Arts Humanities and Social Sciences
Trinity Business School
M.Sc. Finance Degree Examination
Michaelmas Term 2015
BU7508-1
Friday 11th of December, 2015
Derivatives
EXAM HALL
09:30 11:30
Prof. Roman Matousek (External Examiner)
Dr. Jen
Aside on the Value of Forward Rate Agreement
This note is to be read alongside the lecture on Forwards and Swaps in Fixed Income Securities.
The note explains why the value of a Forward Rate Agreement (FRA) to the xed rate receiver
(oating rate payer) can
Option Pricing Revisited
The Black-Scholes Model
The Black-Scholes Random Walk
Assumption
Consider
a stock whose price is S
In a short period of time of length t the
change in the stock price is assumed to be
normal with mean S t and standard
deviation
Chapter 8: BASICS OF
RESIDENTIAL MORTGAGE
BACKED SECURITIES
8.1 SECURITIZATION
8.1.1 The Main Players in the RMBS Market
8.1.2 Private Labels and the 2007 2009 Credit
Crisis
8.1.3 Default Risk and Prepayment in Agency
RMBSs
8.1 SECURITIZATION
Some ins
Immunization Example
A retiree at 60 expects to live another 30 years
and has $1 million at her retirement
Two extreme options open to retiree are:
1. Invest fully in 6-month T-bills
2. Invest fully in 30-year T-bonds
If retiree lives only from interes
Determining the Fair Value of a Swap after Inception
Introduction
Let f (0, Ti , T j ) denote the forward rate from time Ti to time T j . Then
f (0, Ti , T j ) =
1
T j Ti
Z (0, Ti )
1
Z ( 0, T j )
This is clear from the fact that
Z (0, Ti )
1
= Z ( 0, T j
Aside on the Expectations Hypothesis
This note is to be read along with the lecture on the theories of the term structure in Fixed Income
Securities (chapter 7 textbook) and explains why the expectations hypothesis, as often taught in
introductory nance c
Chapter 1: AN INTRODUCTION
TO FIXED INCOME
MARKETS
Dr. Conall OSullivan
1.1 INTRODUCTION
1.1.1 The Complexity of Fixed Income
Markets
1.1.2 No Arbitrage and the Law of One
Price
1.1.1 The Complexity of Fixed Income
Markets
Debt markets have expanded, n
Chapter 3: BASICS OF
INTEREST RATE RISK
MANAGEMENT
3.1 THE VARIATION IN INTEREST
RATES
3.1.1 The Savings and Loan Debacle
3.1.2 The Bankruptcy of Orange County
3.1.1 The Savings and Loan Debacle
Savings and Loan (S&L) earned revenue from the
difference
Chapter 2: BASICS OF FIXED
INCOME SECURITIES
2.1 DISCOUNT FACTORS
2.1.1 Discount Factors across Maturities
2.1.2 Discount Factors over Time
2.1.1 Discount Factors across
Maturities
The discount factor between two dates, t and T,
provides the term of ex
Chapter 9: ONE STEP
BINOMIAL TREES
9.1 A ONE-STEP INTEREST RATE
BINOMIAL TREE
9.1.1 Continuous Compounding
9.1.2 The Binomial Tree for a Two-Period Zero
Coupon Bond
9.1 A ONE-STEP INTEREST RATE
BINOMIAL TREE
An interest rate tree starts with the specif
Chapter 4: BASIC
REFINEMENTS IN INTEREST
RATE RISK MANAGEMENT
4.1 CONVEXITY
4.1.1 The Convexity of Zero Coupon Bonds
4.1.2 The Convexity of a Portfolio of Securities
4.1.3 The Convexity of a Coupon Bond
4.1.4 Positive Convexity: Good News for Average
Retu
Chapter 7: INFLATION,
MONETARY POLICY AND THE
FEDERAL FUNDS RATE
7.1 THE FEDERAL RESERVE
7.1.1 Monetary Policy, Economic Growth, and
Inflation
7.1.2 The Tools of Monetary Policy
7.1.3 The Federal Funds Rate
7.1 THE FEDERAL RESERVE
The Federal Reserve
Chapter 10: MULTISTEP
BINOMIAL TREES
10.1 A TWO-STEP BINOIMAL TREE
Consider extending the tree to one more period:
Note that the tree is recombining
An up and down movement is the same as a down and
up movement
10.1 A TWO-STEP BINOIMAL TREE
So we have