Basic Numerical Procedures
Which of the following can be estimated for an American option by constructing a single
binomial tree: delta, gamma, vega, theta, rho?
Delta, gamma, and theta can be determined from a
The spread between the yield on a three-year corporate bond and the yield on a similar riskfree bond is 50 basis points. The recovery rate is 30%. Estimate the average hazard rate per
year over the t
Estimating Volatilities and Correlations
Explain the exponentially weighted moving average (EWMA) model for estimating volatility
from historical data.
Define ui as ( Si Si 1 ) Si 1 , where Si is value of a mark
Value at Risk
Consider a position consisting of a $100,000 investment in asset A and a $100,000
investment in asset B. Assume that the daily volatilities of both assets are 1% and that the
coefficient of correla
A stock price is currently $40. It is known that at the end of one month it will be either $42 or
$38. The risk-free interest rate is 8% per annum with continuous compounding. What is the
Explain the difference between the net present value approach and the risk-neutral valuation
approach for valuing a new capital investment opportunity. What are the advantages of the
A bank quotes you an interest rate of 14% per annum with quarterly compounding. What is
the equivalent rate with (a) continuous compounding and (b) annual compounding?
(a) The rate with continuous c