Question 1

For pricing purposes how important is it to know the true probabilities?

Accepted Answer

It is not important to know the true probabilities, as long as they are consistent. This is shown by the fact the we use risk neutral probabilities to price, knowing that they are not the true (risk natural) probabilities.

Question 2

What is risk neutral pricing?

Accepted Answer

Risk neutral pricing means to deliberately modify the probabilities on a tree or model, in order to set the market price of risk to zero. This simpliﬁes the calcualations made when pricing securities.

Question 3

What is the market price of risk underlying the tree presented?

Accepted Answer

The answer of What is the market price of risk...

Question 4

Assuming that there is a risk premium in the market (people worry about risk and expect to be compensated for it), is risk neutral probability for an up state (high interest rates) higher, lower or the same as the risk natural probability?

Accepted Answer

Risk neutral probabilities tend to be hi

Question 5

You are given the following interest rate tree. Use it when required in the
exercises.  
-What is the favored approach in the development of interest rate models? CAPM?

Accepted Answer

The favored approach is to use

Question 6

What is a risk neutral probability?

Accepted Answer

Risk neutral probability is th

Question 7

What values can a one year zero coupon bond take at t =0.5?

Accepted Answer

It can be

Question 8

What is the risk neutral probability p∗ ofthetreepresented?

Accepted Answer

We have th

Question 9

Why are forward interst rates and the risk neutral expected future interest rates not the same?

Accepted Answer

The key to understand this is that price

Question 10

Using risk neutral pricing obtain the value for a European option on inter- est rates with maturity at t =0.5, rK =1.5% and payo?: 100 × max(rt ? rK, 0).

Accepted Answer

The price

Question 11

Are forward interest rates equal to the market's expectation of future interest rates?

Accepted Answer

No. Current high forward rates

Question 12

from a given risk neutral tree can you compute the mar- ket participants' expectation on the level of interest rates in the future? Explain.

Accepted Answer

A) True 
 B)False

Question 13

You are given the following interest rate tree. Use it when required in the
exercises.  
-What is a replicating portfolio?

Accepted Answer

The answer of You are given the following interest rate...

Question 14

Given the tree at the begining of this chapter, what is the value of a zero coupon bond maturing in six months?

Accepted Answer

The value

Question 15

What is the market price of risk?

Accepted Answer

The market price of risk is deﬁned by th

For pricing purposes how important is it to know the true probabilities?

What is risk neutral pricing?

What is the market price of risk underlying the tree presented?

Assuming that there is a risk premium in the market (people worry about risk and expect to be compensated for it), is risk neutral probability for an up state (high interest rates) higher, lower or the same as the risk natural probability?

You are given the following interest rate tree. Use it when required in the exercises. -What is the favored approach in the development of interest rate models? CAPM?

What is a risk neutral probability?

What values can a one year zero coupon bond take at t =0.5?

What is the risk neutral probability p∗ ofthetreepresented?

Why are forward interst rates and the risk neutral expected future interest rates not the same?

Using risk neutral pricing obtain the value for a European option on inter- est rates with maturity at t =0.5, rK =1.5% and payo?: 100 × max(rt ? rK, 0).

Are forward interest rates equal to the market's expectation of future interest rates?

from a given risk neutral tree can you compute the mar- ket participants' expectation on the level of interest rates in the future? Explain.

You are given the following interest rate tree. Use it when required in the exercises. -What is a replicating portfolio?

Given the tree at the begining of this chapter, what is the value of a zero coupon bond maturing in six months?

What is the market price of risk?

An Introduction to Fixed Income Markets

Basics of Fixed Income Securities

Basics of Interest Rate Risk Management

Basic Refinements in Interest Rate Risk Management

Interest Rate Derivatives: Forwards and Swaps

Interest Rate Derivatives: Futures and Options

Inflation, Monetary Policy, and the Federal Funds Rate

Basics of Residential Mortgage Backed Securities

Multi-Step Binomial Trees

Risk Neutral Trees and Derivative Pricing

American Options

Monte Carlo Simulations on Trees

Interest Rate Models in Continuous Time

No Arbitrage and the Pricing of Interest Rate Securities

Dynamic Hedging and Relative Value Trades

Dynamic Hedging and Relative Value Trades

The Risk and Return of Interest Rate Securities

No Arbitrage Models and Standard Derivatives

The Market Model for Standard Derivatives

Forward Risk Neutral Pricing and the Libor Market Model

Multifactor Models

Filters

Exam 9: One Step Binomial Trees

For pricing purposes how important is it to know the true probabilities?

What is risk neutral pricing?

What is the market price of risk underlying the tree presented?

Assuming that there is a risk premium in the market (people worry about risk and expect to be compensated for it), is risk neutral probability for an up state (high interest rates) higher, lower or the same as the risk natural probability?

You are given the following interest rate tree. Use it when required in the exercises. -What is the favored approach in the development of interest rate models? CAPM?

What is a risk neutral probability?

What values can a one year zero coupon bond take at t =0.5?

What is the risk neutral probability p∗ ofthetreepresented?

Why are forward interst rates and the risk neutral expected future interest rates not the same?

Using risk neutral pricing obtain the value for a European option on inter- est rates with maturity at t =0.5, rK =1.5% and payo?: 100 × max(rt ? rK, 0).

Are forward interest rates equal to the market's expectation of future interest rates?

from a given risk neutral tree can you compute the mar- ket participants' expectation on the level of interest rates in the future? Explain.

You are given the following interest rate tree. Use it when required in the exercises. -What is a replicating portfolio?

Given the tree at the begining of this chapter, what is the value of a zero coupon bond maturing in six months?

What is the market price of risk?

An Introduction to Fixed Income Markets

Basics of Fixed Income Securities

Basics of Interest Rate Risk Management

Basic Refinements in Interest Rate Risk Management

Interest Rate Derivatives: Forwards and Swaps

Interest Rate Derivatives: Futures and Options

Inflation, Monetary Policy, and the Federal Funds Rate

Basics of Residential Mortgage Backed Securities

Multi-Step Binomial Trees

Risk Neutral Trees and Derivative Pricing

American Options

Monte Carlo Simulations on Trees

Interest Rate Models in Continuous Time

No Arbitrage and the Pricing of Interest Rate Securities

Dynamic Hedging and Relative Value Trades

Dynamic Hedging and Relative Value Trades

The Risk and Return of Interest Rate Securities

No Arbitrage Models and Standard Derivatives

The Market Model for Standard Derivatives

Forward Risk Neutral Pricing and the Libor Market Model

Multifactor Models

Filters