# 2015 Exam 2 Syllabus Financial Mathematics Exam

Size: px
Start display at page:

## Transcription

1 2015 Exam 2 Syllabus Financial Mathematics Exam The syllabus for this exam is defined in the form of learning objectives that set forth, usually in broad terms, what the candidate should be able to do in actual practice. Please check the Syllabus Update for this exam for any changes to this syllabus or options for obtaining credit for this exam. The purpose of the syllabus for this examination is to develop knowledge of the fundamental concepts of financial mathematics, and how those concepts are applied in calculating present and accumulated values for various streams of cash flows as a basis for future use in: reserving, valuation, pricing, asset/liability management, investment income, capital budgeting, and valuing contingent cash flows. The candidate will also be given an introduction to financial instruments, including derivatives, and the concept of noarbitrage as it relates to financial mathematics. The Financial Mathematics Exam assumes a basic knowledge of calculus and an introductory knowledge of probability. A. Interest Theory LEARNING OBJECTIVES 1. For time value of money, define and recognize the definitions of the following terms: a. Interest rate (rate of interest) b. Simple interest c. Compound interest d. Accumulation function e. Future value f. Present value/net present value g. Discount factor h. Discount rate (rate of discount) i. Convertible m-thly j. Nominal rate k. Effective rate l. Inflation and real rate of interest m. Force of interest n. Equation of value 2. For time value of money, the candidate will be able to do the following: a. Given any two of interest rate, present value, or future value, calculate the third based on simple or compound interest. b. Given any one of the effective interest rate, the nominal interest rate convertible m-thly, the effective discount rate, the nominal discount rate convertible m-thly, or the force of interest, calculate all of the other items. c. Write the equation of value given a set of cash flows and an interest rate Exam 2 Syllabus 2014, Casualty Actuarial Society, All Rights Reserved Exam 1-1

2 3. For annuities with payments that are not contingent, define and recognize the definitions of the following terms: a. Annuity-immediate b. Annuity-due c. Perpetuity d. Payable m-thly, or Payable continuously e. Level payment annuity f. Arithmetic increasing/decreasing payment annuity g. Geometric increasing/decreasing payment annuity h. Term of annuity 4. For annuities with payments that are not contingent, the candidate will be able to do the following: a. Given an annuity with level payments, immediate (or due), payable m-thly, (or payable continuously), and any three of present value, future value, interest rate, payment, and term calculate the remaining two items. b. Given an annuity with non-level payments, immediate (or due), payable m-thly, (or payable continuously), the pattern of payment amounts, and any three of present value, future value, interest rate, payment amounts, and term of annuity calculate the remaining two items. 5. For loans, define and recognize the definitions of the following terms: a. Principal b. Interest c. Term of loan d. Outstanding balance e. Final payment (drop payment, balloon payment) f. Amortization g. Sinking fund 6. For loans, the candidate will be able to do the following: a. Given any four of term of loan, interest rate, payment amount, payment period, principal, calculate the remaining items. b. Calculate the outstanding balance at any point in time. c. Calculate the amount of interest and principal repayment in a given payment. d. Given the quantities, except one, in a sinking fund arrangement calculate the missing quantity. 7. For bonds, define and recognize the definitions of the following terms: a. Price b. Redemption value c. Par Value/Face value d. Coupon, Coupon rate e. Term of bond f. Yield rate g. Callable/non-callable g. Book value h. Accumulation of discount/amortization of premium 8. For bonds, the candidate will be able to do the following: a. Given any four of price, redemption value, yield rate, coupon rate, and term of bond, calculate the remaining item Exam 2 Syllabus Exam 1-2

3 9. For general cash flows and portfolios, define and recognize the definitions of the following terms: a. Yield rate/rate of return b. Dollar-weighted rate of return/time-weighted rate of return c. Current value d. Duration (Macaulay, modified and effective) e. Convexity f. Portfolio and investment year allocation methods g. Spot rate h. Forward rate i. Yield curve j. Stock price, stock dividend 10. For general cash flows and portfolios, the candidate will be able to do the following: a. Calculate the current value of a set of cash flows. b. Calculate the portfolio yield rate. c. Calculate the dollar-weighted and time-weighted rate of return. d. Calculate the duration and convexity of a set of cash flows. e. Calculate either Macaulay or modified duration given the other. f. Use duration and convexity to approximate the change in present value due to a change in interest rate. g. Calculate the price of a stock using the dividend discount model. 11. For immunization, define and recognize the definitions of the following terms: a. Cash-flow matching; b. Immunization (including full immunization); c. Redington immunization. 12. For immunization, the candidate will be able to do the following: a. Construct an investment portfolio to fully immunize a set of liability cash flows. b. Construct an investment portfolio to match present value and duration of a set of liability cash flows. c. Construct an investment portfolio to exactly match a set of liability cash flows. B. Financial Economics LEARNING OBJECTIVES 1. For general derivatives, define and recognize the definitions of the following terms: a. Derivative, Underlying asset, Over-the-counter market b. Ask price, Bid price, Bid-ask spread c. Short selling, Short position, Long position d. Stock index e. Spot price f. Net profit/payoff g. Credit risk h. Marking-to-market i. Margin, Maintenance margin, Margin call 2. For general derivatives, evaluate an investor's margin position based on changes in asset values Exam 2 Syllabus Exam 1-3

4 3. For options, define and recognize the definitions of the following terms: a. Call option, Put option b. Expiration, Expiration date c. Strike price/exercise price d. European option, American option, Bermudan option e. In-the-money, At-the-money, Out-of-the-money f. Covered call, Naked writing g. Dividends h. Put-call parity 4. For options, evaluate the payoff and profit of basic derivative contracts. 5. For hedging and investment strategies, define and recognize the definitions of the following terms: a. Hedging, Arbitrage b. Diversifiable risk, Nondiversifiable risk c. Synthetic forwards d. Spreads (including bull, bear, box, and ratio spreads) e. Collars (including zero-cost collars), Paylater strategy f. Straddles (including strangles, written straddles and butterfly spreads) g. Convertible bond, Mandatorily convertible bond 6. For hedging and investment strategies, the candidate will be able to: a. Explain how derivative securities can be used as tools to manage financial risk. b. Explain the reasons to hedge and not to hedge. c. Evaluate the payoff and profit of hedging strategies. 7. For forwards and futures, define and recognize the definitions of the following terms: a. Forward contract, Prepaid forward contract b. Outright purchase, Fully leveraged purchase c. Implied repo rate d. Cost of carry e. Lease rate f. Futures contract 8. For forwards and futures, the candidate will be able to: a. Determine forward price from prepaid forward price. b. Explain the relationship between forward price and futures price. c. Explain the relationship between forward price and future stock price. d. Use the concept of no-arbitrage to determine the theoretical value of futures and forwards. e. Given any four of call premium, put premium, forward price, strike price and interest rate, calculate the remaining item using the put-call parity formula. 9. For swaps, define and recognize the definitions of the following terms: a. Swap, Prepaid swap b. Swap term, Swap spread, Notional Amount c. Simple commodity swap, Interest rate swap d. Deferred swap 10. Use the concept of no-arbitrage to determine the theoretical values of swaps Exam 2 Syllabus Exam 1-4

5 Options for Obtaining Exam 2 Credit The CAS will grant credit for Exam 2 to those who have successfully completed one of the following examinations: Organization Actuarial Society of South Africa Actuaries Institute (Australia) Canadian Institute of Actuaries Institute of Actuaries of India Institute and Faculty of Actuaries (U.K.) Society of Actuaries Exam A201, Financial Mathematics University Accreditation Program credit for Financial Mathematics Exam FM, Financial Mathematics To obtain credit, the candidate should contact the Actuaries Resource Center Provide the name of the actuarial organization that administered the exam, the exam name and number, the date that you passed, as well as your full name, date of birth, and contact information. *Note: The Exam 2 credit chart includes a new waiver for the Actuarial Society of South Africa Exam 2 Syllabus Exam 1-5

### Financial Mathematics Exam

2014 Exam 2 Syllabus Financial Mathematics Exam The purpose of the syllabus for this examination is to develop knowledge of the fundamental concepts of financial mathematics and how those concepts are

### Exam P - Total 23/23 - 1 -

Exam P Learning Objectives Schools will meet 80% of the learning objectives on this examination if they can show they meet 18.4 of 23 learning objectives outlined in this table. Schools may NOT count a

### STAT2400 STAT2400 STAT2400 STAT2400 STAT2400 STAT2400 STAT2400 STAT2400&3400 STAT2400&3400 STAT2400&3400 STAT2400&3400 STAT3400 STAT3400

Exam P Learning Objectives All 23 learning objectives are covered. General Probability STAT2400 STAT2400 STAT2400 STAT2400 STAT2400 STAT2400 STAT2400 1. Set functions including set notation and basic elements

### n(n + 1) 2 1 + 2 + + n = 1 r (iii) infinite geometric series: if r < 1 then 1 + 2r + 3r 2 1 e x = 1 + x + x2 3! + for x < 1 ln(1 + x) = x x2 2 + x3 3

ACTS 4308 FORMULA SUMMARY Section 1: Calculus review and effective rates of interest and discount 1 Some useful finite and infinite series: (i) sum of the first n positive integers: (ii) finite geometric

### A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2%

1 Exam FM Questions Practice Exam 1 1. Consider the following yield curve: Year Spot Rate 1 5.5% 2 5.0% 3 5.0% 4 4.5% 5 4.0% Find the four year forward rate. A) 1.8% B) 1.9% C) 2.0% D) 2.1% E) 2.2% 2.

### SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Financial Economics

SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Financial Economics June 2014 changes Questions 1-30 are from the prior version of this document. They have been edited to conform

### SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS

SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS This page indicates changes made to Study Note FM-09-05. April 28, 2014: Question and solutions 61 were added. January 14, 2014:

### SOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Interest Theory

SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Interest Theory This page indicates changes made to Study Note FM-09-05. January 14, 2014: Questions and solutions 58 60 were

### Name Graph Description Payoff Profit Comments. commodity at some point in the future at a prespecified. commodity at some point

Name Graph Description Payoff Profit Comments Long Commitment to purchase commodity at some point in the future at a prespecified price S T - F S T F No premium Asset price contingency: Always Maximum

### Finance 436 Futures and Options Review Notes for Final Exam. Chapter 9

Finance 436 Futures and Options Review Notes for Final Exam Chapter 9 1. Options: call options vs. put options, American options vs. European options 2. Characteristics: option premium, option type, underlying

### SOCIETY OF ACTUARIES/CASUALTY ACTUARIAL SOCIETY EXAM FM SAMPLE QUESTIONS

SOCIETY OF ACTUARIES/CASUALTY ACTUARIAL SOCIETY EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Copyright 2005 by the Society of Actuaries and the Casualty Actuarial Society Some of the questions

### INSTITUTE OF ACTUARIES OF INDIA

INSTITUTE OF ACTUARIES OF INDIA EXAMINATIONS 15 th November 2010 Subject CT1 Financial Mathematics Time allowed: Three Hours (15.00 18.00 Hrs) Total Marks: 100 INSTRUCTIONS TO THE CANDIDATES 1. Please

### Nominal rates of interest and discount

1 Nominal rates of interest and discount i (m) : The nominal rate of interest payable m times per period, where m is a positive integer > 1. By a nominal rate of interest i (m), we mean a rate payable

### Overview. Option Basics. Options and Derivatives. Professor Lasse H. Pedersen. Option basics and option strategies

Options and Derivatives Professor Lasse H. Pedersen Prof. Lasse H. Pedersen 1 Overview Option basics and option strategies No-arbitrage bounds on option prices Binomial option pricing Black-Scholes-Merton

### CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS

1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries

### INSTITUTE AND FACULTY OF ACTUARIES EXAMINATION

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 INSTITUTE AND FACULTY OF ACTUARIES EXAMINATION 12 April 2016 (am) Subject CT1 Financial Mathematics Core

### Trading Strategies Involving Options. Chapter 11

Trading Strategies Involving Options Chapter 11 1 Strategies to be Considered A risk-free bond and an option to create a principal-protected note A stock and an option Two or more options of the same type

### Bond valuation and bond yields

RELEVANT TO ACCA QUALIFICATION PAPER P4 AND PERFORMANCE OBJECTIVES 15 AND 16 Bond valuation and bond yields Bonds and their variants such as loan notes, debentures and loan stock, are IOUs issued by governments

### Manual for SOA Exam FM/CAS Exam 2.

Manual for SOA Exam FM/CAS Exam 2. Chapter 6. Variable interest rates and portfolio insurance. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam

### OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)

OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) WHAT ARE OPTIONS? Derivative securities whose values are derived from the values of the underlying securities. Stock options quotations from WSJ. A call

### How To Sell A Callable Bond

1.1 Callable bonds A callable bond is a fixed rate bond where the issuer has the right but not the obligation to repay the face value of the security at a pre-agreed value prior to the final original maturity

### 11 Option. Payoffs and Option Strategies. Answers to Questions and Problems

11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of \$80 and a cost of \$5. Graph the profits and losses at expiration for various

### Contents. Introduction 1

Contents Introduction 1 PART I FINANCIAL MATHEMATICS 7 SEC. 1 The Measurement of Interest 9 1a Basic Concepts 9 Calculator Notes 14 Calculator Notes #1: Formatting; Present Values and Future Values 15

### Manual for SOA Exam FM/CAS Exam 2.

Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivatives markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall

### FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008

FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes consider the way put and call options and the underlying can be combined to create hedges, spreads and combinations. We will consider the

### Introduction to Real Estate Investment Appraisal

Introduction to Real Estate Investment Appraisal Maths of Finance Present and Future Values Pat McAllister INVESTMENT APPRAISAL: INTEREST Interest is a reward or rent paid to a lender or investor who has

### w w w.c a t l e y l a k e m a n.c o m 0 2 0 7 0 4 3 0 1 0 0

A ADR-Style: for a derivative on an underlying denominated in one currency, where the derivative is denominated in a different currency, payments are exchanged using a floating foreign-exchange rate. The

### General Forex Glossary

General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without

### Name: 1 (5) a b c d e TRUE/FALSE 1 (2) TRUE FALSE. 2 (5) a b c d e. 3 (5) a b c d e 2 (2) TRUE FALSE. 4 (5) a b c d e.

Name: Thursday, February 28 th M375T=M396C Introduction to Actuarial Financial Mathematics Spring 2013, The University of Texas at Austin In-Term Exam I Instructor: Milica Čudina Notes: This is a closed

### Introduction to Options. Derivatives

Introduction to Options Econ 422: Investment, Capital & Finance University of Washington Summer 2010 August 18, 2010 Derivatives A derivative is a security whose payoff or value depends on (is derived

### Return to Risk Limited website: www.risklimited.com. Overview of Options An Introduction

Return to Risk Limited website: www.risklimited.com Overview of Options An Introduction Options Definition The right, but not the obligation, to enter into a transaction [buy or sell] at a pre-agreed price,

### CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus \$250 1329.78 = \$332,445. The closing futures price for the March contract was 1364.00,

### CHAPTER 20. Financial Options. Chapter Synopsis

CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified

### 9 Basics of options, including trading strategies

ECG590I Asset Pricing. Lecture 9: Basics of options, including trading strategies 1 9 Basics of options, including trading strategies Option: The option of buying (call) or selling (put) an asset. European

### FIN 3710. Final (Practice) Exam 05/23/06

FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name

### OPTIONS IN CORPORATE FINANCE FINA 763 Spring 2005

OPTIONS IN CORPORATE FINANCE FINA 763 Spring 2005 Dr. William T. Moore Phone: 777-4905 (office) Office: BA 473 782-6434 (home) Office Hours: Open e-mail: aardvark@moore.sc.edu Objective This course is

### FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008. Options

FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes describe the payoffs to European and American put and call options the so-called plain vanilla options. We consider the payoffs to these

### CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support

### Option Valuation. Chapter 21

Option Valuation Chapter 21 Intrinsic and Time Value intrinsic value of in-the-money options = the payoff that could be obtained from the immediate exercise of the option for a call option: stock price

### Chapter 03 - Basic Annuities

3-1 Chapter 03 - Basic Annuities Section 7.0 - Sum of a Geometric Sequence The form for the sum of a geometric sequence is: Sum(n) a + ar + ar 2 + ar 3 + + ar n 1 Here a = (the first term) n = (the number

### Lecture 12. Options Strategies

Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same

### Chapter 5 Financial Forwards and Futures

Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment

### Introduction to Options

Introduction to Options By: Peter Findley and Sreesha Vaman Investment Analysis Group What Is An Option? One contract is the right to buy or sell 100 shares The price of the option depends on the price

### t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

### 1. The Purdue Life Insurance Company has two assets and two liabilities.

Chapter 9, Section 1 1. The Purdue Life Insurance Company has two assets and two liabilities. The assets are: a. A 5 year par value bond with a maturity value of 100,000. The bond pays annual coupons at

### How To Become A Life Insurance Agent

Traditional, investment, and risk management actuaries in the life insurance industry Presentation at California Actuarial Student Conference University of California, Santa Barbara April 4, 2015 Frank

### CHAPTER 22 Options and Corporate Finance

CHAPTER 22 Options and Corporate Finance Multiple Choice Questions: I. DEFINITIONS OPTIONS a 1. A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset

### Study Questions for Actuarial Exam 2/FM By: Aaron Hardiek June 2010

P a g e 1 Study Questions for Actuarial Exam 2/FM By: Aaron Hardiek June 2010 P a g e 2 Background The purpose of my senior project is to prepare myself, as well as other students who may read my senior

### Financial Mathematics for Actuaries. Chapter 8 Bond Management

Financial Mathematics for Actuaries Chapter 8 Bond Management Learning Objectives 1. Macaulay duration and modified duration 2. Duration and interest-rate sensitivity 3. Convexity 4. Some rules for duration

### Options: Definitions, Payoffs, & Replications

Options: Definitions, s, & Replications Liuren Wu Zicklin School of Business, Baruch College Options Markets Liuren Wu (Baruch) s Options Markets 1 / 34 Definitions and terminologies An option gives the

### Convenient Conventions

C: call value. P : put value. X: strike price. S: stock price. D: dividend. Convenient Conventions c 2015 Prof. Yuh-Dauh Lyuu, National Taiwan University Page 168 Payoff, Mathematically Speaking The payoff

### ACCOUNTING AND FINANCE DIVISION (www.accountingandfinance.stir.ac.uk)

ACCOUNTING AND FINANCE DIVISION (www.accountingandfinance.stir.ac.uk) MSc in Finance MSc in Investment Analysis MSc in Banking and Finance MSc in Computing for Financial Markets MSc in International Accounting

### Underlying (S) The asset, which the option buyer has the right to buy or sell. Notation: S or S t = S(t)

INTRODUCTION TO OPTIONS Readings: Hull, Chapters 8, 9, and 10 Part I. Options Basics Options Lexicon Options Payoffs (Payoff diagrams) Calls and Puts as two halves of a forward contract: the Put-Call-Forward

### Manual for SOA Exam FM/CAS Exam 2.

Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivatives markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall

### Factors Affecting Option Prices

Factors Affecting Option Prices 1. The current stock price S 0. 2. The option strike price K. 3. The time to expiration T. 4. The volatility of the stock price σ. 5. The risk-free interest rate r. 6. The

### CHAPTER 20: OPTIONS MARKETS: INTRODUCTION

CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk

### SYLLABUS The ACI Dealing Certificate (Prometric Code: 3I0-008)

SYLLABUS The ACI Dealing Certificate (Prometric Code: 3I0-008) Examination delivered in ENGLISH and GERMAN The ACI Dealing Certificate is a foundation programme that allows candidates to acquire a working

### Option Values. Determinants of Call Option Values. CHAPTER 16 Option Valuation. Figure 16.1 Call Option Value Before Expiration

CHAPTER 16 Option Valuation 16.1 OPTION VALUATION: INTRODUCTION Option Values Intrinsic value - profit that could be made if the option was immediately exercised Call: stock price - exercise price Put:

### Lecture 09: Multi-period Model Fixed Income, Futures, Swaps

Lecture 09: Multi-period Model Fixed Income, Futures, Swaps Prof. Markus K. Brunnermeier Slide 09-1 Overview 1. Bond basics 2. Duration 3. Term structure of the real interest rate 4. Forwards and futures

### Econ 330 Exam 1 Name ID Section Number

Econ 330 Exam 1 Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If during the past decade the average rate of monetary growth

### Investments Analysis

Investments Analysis Last 2 Lectures: Fixed Income Securities Bond Prices and Yields Term Structure of Interest Rates This Lecture (#7): Fixed Income Securities Term Structure of Interest Rates Interest

### Options: Valuation and (No) Arbitrage

Prof. Alex Shapiro Lecture Notes 15 Options: Valuation and (No) Arbitrage I. Readings and Suggested Practice Problems II. Introduction: Objectives and Notation III. No Arbitrage Pricing Bound IV. The Binomial

### Call Price as a Function of the Stock Price

Call Price as a Function of the Stock Price Intuitively, the call price should be an increasing function of the stock price. This relationship allows one to develop a theory of option pricing, derived

### London School of Economics FM423 - FT - 2008-9. Course Syllabus

London School of Economics FM423 - FT - 2008-9 Department of Finance Vayanos - Yuan - Zachariadis Course Syllabus Course Description This is the core investments course in the MSc Finance Full-Time Programme.

### LOS 56.a: Explain steps in the bond valuation process.

The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction

### Measurement Concepts for Banking, Trading, and Investing

Banking,, Banking,, for the MFM Orientation September 1, 2010 Banking,, If you are going to work with bankers, traders, or investment managers, it is important for you to understand the language and concepts

### Management Accounting Financial Strategy

PAPER P9 Management Accounting Financial Strategy The Examiner provides a short study guide, for all candidates revising for this paper, to some first principles of finance and financial management Based

### Introduction. Part IV: Option Fundamentals. Derivatives & Risk Management. The Nature of Derivatives. Definitions. Options. Main themes Options

Derivatives & Risk Management Main themes Options option pricing (microstructure & investments) hedging & real options (corporate) This & next weeks lectures Introduction Part IV: Option Fundamentals»

### Valuation Report on Prudential Annuities Limited as at 31 December 2003. The investigation relates to 31 December 2003.

PRUDENTIAL ANNUITIES LIMITED Returns for the year ended 31 December 2003 SCHEDULE 4 Valuation Report on Prudential Annuities Limited as at 31 December 2003 1. Date of investigation The investigation relates

### Note: There are fewer problems in the actual Final Exam!

HEC Paris Practice Final Exam Questions Version with Solutions Financial Markets Fall 2013 Note: There are fewer problems in the actual Final Exam! Problem 1. Are the following statements True, False or

### CGF Five-Year Government. OGB Options on Ten-Year Government

CGZ Two-Year Government of Canada Bond Futures CGF Five-Year Government of Canada Bond Futures CGB Ten-Year Government of Canada Bond Futures LGB 30-Year Government of Canada Bond Futures OGB Options on

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES 1. Expectations hypothesis. The yields on long-term bonds are geometric averages of present and expected future short rates. An upward sloping curve is

### We first solve for the present value of the cost per two barrels: (1.065) 2 = 41.033 (1.07) 3 = 55.341. x = 20.9519

Chapter 8 Swaps Question 8.1. We first solve for the present value of the cost per two barrels: \$22 1.06 + \$23 (1.065) 2 = 41.033. We then obtain the swap price per barrel by solving: which was to be shown.

### Chapter 21: Options and Corporate Finance

Chapter 21: Options and Corporate Finance 21.1 a. An option is a contract which gives its owner the right to buy or sell an underlying asset at a fixed price on or before a given date. b. Exercise is the

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

Chapter - The Term Structure of Interest Rates CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

### CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES

CHAPTER : THE TERM STRUCTURE OF INTEREST RATES CHAPTER : THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.. In general, the forward rate can be viewed as the sum of the market s expectation of the future

### Certification Program on Corporate Treasury Management

Certification Program on Corporate Treasury Management Introduction to corporate treasury management Introduction to corporate treasury management: relevance, scope, approach and issues Understanding treasury

### 2. How is a fund manager motivated to behave with this type of renumeration package?

MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff

FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

### I. Readings and Suggested Practice Problems. II. Risks Associated with Default-Free Bonds

Prof. Alex Shapiro Lecture Notes 13 Bond Portfolio Management I. Readings and Suggested Practice Problems II. Risks Associated with Default-Free Bonds III. Duration: Details and Examples IV. Immunization

### Options Markets: Introduction

Options Markets: Introduction Chapter 20 Option Contracts call option = contract that gives the holder the right to purchase an asset at a specified price, on or before a certain date put option = contract

### GLOSSARY OF TERMS --- SECURITIES. Prepared by David Forfar, MA, FFA with the assistance of David Raymont, Librarian of Institute of Actuaries, London.

GLOSSARY OF TERMS --- SECURITIES Prepared by David Forfar, MA, FFA with the assistance of David Raymont, Librarian of Institute of Actuaries, London. Security:- normally refers to an investment which you

### Final Exam Practice Set and Solutions

FIN-469 Investments Analysis Professor Michel A. Robe Final Exam Practice Set and Solutions What to do with this practice set? To help students prepare for the final exam, three practice sets with solutions

### Fixed Income Portfolio Management. Interest rate sensitivity, duration, and convexity

Fixed Income ortfolio Management Interest rate sensitivity, duration, and convexity assive bond portfolio management Active bond portfolio management Interest rate swaps 1 Interest rate sensitivity, duration,

### Chapter 6. Discounted Cash Flow Valuation. Key Concepts and Skills. Multiple Cash Flows Future Value Example 6.1. Answer 6.1

Chapter 6 Key Concepts and Skills Be able to compute: the future value of multiple cash flows the present value of multiple cash flows the future and present value of annuities Discounted Cash Flow Valuation

### www.optionseducation.org OIC Options on ETFs

www.optionseducation.org Options on ETFs 1 The Options Industry Council For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations,

### Long-Term Debt. Objectives: simple present value calculations. Understand the terminology of long-term debt Par value Discount vs.

Objectives: Long-Term Debt! Extend our understanding of valuation methods beyond simple present value calculations. Understand the terminology of long-term debt Par value Discount vs. Premium Mortgages!

### Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator

University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights

### Figure S9.1 Profit from long position in Problem 9.9

Problem 9.9 Suppose that a European call option to buy a share for \$100.00 costs \$5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances

### Fin 3710 Investment Analysis Professor Rui Yao CHAPTER 14: OPTIONS MARKETS

HW 6 Fin 3710 Investment Analysis Professor Rui Yao CHAPTER 14: OPTIONS MARKETS 4. Cost Payoff Profit Call option, X = 85 3.82 5.00 +1.18 Put option, X = 85 0.15 0.00-0.15 Call option, X = 90 0.40 0.00-0.40

### CHAPTER 2. Asset Classes. the Money Market. Money market instruments. Capital market instruments. Asset Classes and Financial Instruments

2-2 Asset Classes Money market instruments CHAPTER 2 Capital market instruments Asset Classes and Financial Instruments Bonds Equity Securities Derivative Securities The Money Market 2-3 Table 2.1 Major

### Course FM / Exam 2. Calculator advice

Course FM / Exam 2 Introduction It wasn t very long ago that the square root key was the most advanced function of the only calculator approved by the SOA/CAS for use during an actuarial exam. Now students

### INSTITUTE OF ACTUARIES OF INDIA

INSTITUTE OF ACTUARIES OF INDIA EXAMINATIONS 17 th November 2011 Subject CT5 General Insurance, Life and Health Contingencies Time allowed: Three Hours (10.00 13.00 Hrs) Total Marks: 100 INSTRUCTIONS TO

### b. June expiration: 95-23 = 95 + 23/32 % = 95.71875% or.9571875.9571875 X \$100,000 = \$95,718.75.

ANSWERS FOR FINANCIAL RISK MANAGEMENT A. 2-4 Value of T-bond Futures Contracts a. March expiration: The settle price is stated as a percentage of the face value of the bond with the final "27" being read

### CHAPTER 21: OPTION VALUATION

CHAPTER 21: OPTION VALUATION 1. Put values also must increase as the volatility of the underlying stock increases. We see this from the parity relation as follows: P = C + PV(X) S 0 + PV(Dividends). Given

### Options/1. Prof. Ian Giddy

Options/1 New York University Stern School of Business Options Prof. Ian Giddy New York University Options Puts and Calls Put-Call Parity Combinations and Trading Strategies Valuation Hedging Options2

### FX, Derivatives and DCM workshop I. Introduction to Options

Introduction to Options What is a Currency Option Contract? A financial agreement giving the buyer the right (but not the obligation) to buy/sell a specified amount of currency at a specified rate on a

### International Capital Market Association

International Capital Market Association International Fixed Income and Derivatives Certificate Programme Syllabus Copyright 2006 ICMA. All rights reserved. 1 Contents I. Introduction... 3 II. Structure