Question 1

Why is it that in a deterministic interest rate world we have that:

Accepted Answer

Because a deterministic interest rate would not bear any risk on account of varying interest rates, this means that under no arbitrage it should give the same return as a the risk-free rate.

Question 2

What are the three steps for derivative pricing and hedging?

Accepted Answer

The three steps are the following: i. Select an interest rate model (e.g. Vasicek). ii. Estimate the parameters of the model, using available data, such as zero coupon bonds. iii. Price the derivative security using the model. iv. Hedge the option exposure through a position in the underlying se- curity.

Question 3

How can we obtain ¯r and ? in order to calibrate the Vasicek model?

Accepted Answer

The answer of How can we obtain ¯r and ?...

Question 4

What is a Partial Diﬀerential Equation (PDE)?

Accepted Answer

A PDE is a diﬀerenti

Question 5

What relation should hold across all securities, given the no arbitrage condition?

Accepted Answer

The follow

Question 6

What's the intuition behind the following relationship:

Accepted Answer

The key terms are: @#IMG-DLM& The numerator of eac

Question 7

Does the Vasicek model match the term structure?

Accepted Answer

The Vasicek model is

Question 8

How can we obtain ? in order to calibrate the Vasicek model?

Accepted Answer

? can be estimated d

Question 9

IntheVasicekmodeldewehavelevel,slopeandcurvatureintheterm structure?

Accepted Answer

Yes, we ha

Question 10

What is a solution to a PDE?

Accepted Answer

Given the following PDE: @#IMG-DLM& A solution to

Question 11

How strong is the correlation among rates with diﬀerent maturities in the term structure obtained from the CIR model?

Accepted Answer

As with the Vasicek

Question 12

For the Vasicek model can we say that always m∗(r, t)=m(r, t)? Explain.

Accepted Answer

No, m(r, t) is the drift parameter for t

Question 13

What do we need to build in order to be able to price any security through no arbitrage?

Accepted Answer

We need to build a p

Question 14

What problem does the Cox-Ingersol-Ross (CIR) model solve when com- pared to the Vasicek and Ho-Lee models?

Accepted Answer

It does no

Question 15

For a deterministic interest rate model, what would be the rate of return on securities? Explain.

Accepted Answer

Given no a

Question 16

How strong is the correlation among rates in the term structure obtained from the Vasicek model? Is this realistic?

Accepted Answer

Rates on the term structure ar

Question 17

Does the following equality hold in the real world?   Why or why not?

Accepted Answer

It does not hold in the real w

Why is it that in a deterministic interest rate world we have that:

What are the three steps for derivative pricing and hedging?

How can we obtain ¯r and ? in order to calibrate the Vasicek model?

What is a Partial Diﬀerential Equation (PDE)?

What relation should hold across all securities, given the no arbitrage condition?

What's the intuition behind the following relationship:

Does the Vasicek model match the term structure?

How can we obtain ? in order to calibrate the Vasicek model?

IntheVasicekmodeldewehavelevel,slopeandcurvatureintheterm structure?

What is a solution to a PDE?

How strong is the correlation among rates with diﬀerent maturities in the term structure obtained from the CIR model?

For the Vasicek model can we say that always m∗(r, t)=m(r, t)? Explain.

What do we need to build in order to be able to price any security through no arbitrage?

What problem does the Cox-Ingersol-Ross (CIR) model solve when com- pared to the Vasicek and Ho-Lee models?

For a deterministic interest rate model, what would be the rate of return on securities? Explain.

How strong is the correlation among rates in the term structure obtained from the Vasicek model? Is this realistic?

Does the following equality hold in the real world? Why or why not?

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

One Step Binomial Trees

Multi-Step Binomial Trees

Risk Neutral Trees and Derivative Pricing

American Options

Monte Carlo Simulations on Trees

Interest Rate Models in Continuous Time

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 15: No Arbitrage and the Pricing of Interest Rate Securities

Why is it that in a deterministic interest rate world we have that:

What are the three steps for derivative pricing and hedging?

How can we obtain ¯r and ? in order to calibrate the Vasicek model?

What is a Partial Diﬀerential Equation (PDE)?

What relation should hold across all securities, given the no arbitrage condition?

What's the intuition behind the following relationship:

Does the Vasicek model match the term structure?

How can we obtain ? in order to calibrate the Vasicek model?

IntheVasicekmodeldewehavelevel,slopeandcurvatureintheterm structure?

What is a solution to a PDE?

How strong is the correlation among rates with diﬀerent maturities in the term structure obtained from the CIR model?

For the Vasicek model can we say that always m∗(r, t)=m(r, t)? Explain.

What do we need to build in order to be able to price any security through no arbitrage?

What problem does the Cox-Ingersol-Ross (CIR) model solve when com- pared to the Vasicek and Ho-Lee models?

For a deterministic interest rate model, what would be the rate of return on securities? Explain.

How strong is the correlation among rates in the term structure obtained from the Vasicek model? Is this realistic?

Does the following equality hold in the real world? Why or why not?

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

One Step Binomial Trees

Multi-Step Binomial Trees

Risk Neutral Trees and Derivative Pricing

American Options

Monte Carlo Simulations on Trees

Interest Rate Models in Continuous Time

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