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
$500,000
investment
in
silver.
Suppose
that
the
daily
volatilities
(or
equivalently, the standard deviations of daily re

Chapter 4
Credit Risk
4.1
Credit Ratings
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
AA

Chapter 5
Credit Derivatives
5.1
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
company.
The company is known as the referenc

Chapter 1
Interest Rates
1.1
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
(e.g., mortgag

Chapter 3
Value at Risk
3.1
Risks based on BASEL II
Market risk is the risk of losses in positions arising from movements in
market prices.
Example : equity risk, interest rate risk, currency risk, commodity risk
Credit risk is the risk that a borrower

Chapter 2
Swaps
2.1
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
3.11
Appendix: the Black-Scholes Model
3.11.1
35
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
hold a