Financial Engineering 2015 Homework III
Deadline: June 11, 2 pm.
1. Suppose that the risk-free zero curbe is flat at 6% per annum with continuous
compounding and that defaults can occur at times 0.25 years, 0.75 years, 1.25
years, and 1.75 years in a 2-ye
Financial Engineering 2015 Homework I
Deadline: April 2, 2 pm.
1. The 6-month, 12-month, 18-month, and 24-month zero rates are 4%, 4.5%,
4.75%, and 5%, with semiannual compounding.
(a) What are the rates with continuous compounding? (1.5 point)
(b) What i
Financial Engineering 2015 Homework II
Deadline: May 7, 2 pm.
1. Consider a position consisting of a $300,000 investment in gold and a
equivalently, the standard deviations of daily re
Rating agencies, such as Moodys, S&P, and Fitch, are in the business of
providing ratings describing the credit worthiness of corporate bonds.
In the S&P rating system, AAA is the best rating. After that comes
Credit Default Swaps
The most popular credit derivative is a credit default swap (CDS). This is
a contract that provides insurance against the risk of a default by particular
The company is known as the referenc
Types of rates
An interest rate (IR, hereafter) in a particular situation denes the amount
of money a borrower promises to pay the lender.
For any given currency, many dierent types of IRs are regularly quoted
Value at Risk
Risks based on BASEL II
Market risk is the risk of losses in positions arising from movements in
Example : equity risk, interest rate risk, currency risk, commodity risk
Credit risk is the risk that a borrower
Mechanics of interest rate swaps
A swap is an agreement to exchange cash ows at specied future times
according to certain specied rules.
The most common type of swap is a plain vanilla interest rate swap.
In this swap, a company agre
3.11 Appendix: the Black-Scholes Model
Appendix: the Black-Scholes Model
A simple model for asset prices: GBM
(EMH revisited) The EMH basically says two things:
The past history is fully reected in the present price, which does not