Deck 17: Dynamic Hedging and Relative Value Trades

Question 1

Using Monte Carlo Simulations, what steps do you need to follow in order to price a coupon bond?

Answer 1

Once you have simulated the interest rate path, discount the payoff and take expectations.

Question 2

What is a Monte Carlo Simulation?

Answer 2

A Monte Carlo Simulation is a methodology of predicting the behavior of a variable by simulating a large number of paths under which the random component of the variable can take any value. The result is a large sample of possible values for the variable from which we can infer its expected value and other moments.

Question 3

How is a 95% conficende interval defined?

Answer 3

Question 4

How can an interest rate process be simulated?

Question 5

Is the price obtained from Monte Carlos Simulations exaclty the same as the one obtained through an analytical formula?

Question 6

How can you increase the accuracy of the price given by the model when using Monte Carlo Simulations?

Question 7

What is a standard error?

Question 8

What is a confidence interval?

Question 9

What risks are involved in a range ?oater?

Question 10

How is the Risk Neutral process obtained?

Question 11

Why were range floaters so popular during the mid-nineties?

Question 12

What is the Feynman-Kac Theorem?

Question 13

How can you compute gamma?

Question 14

There is a "Forward Approximation" and a "Central Approximation", is there a "Backward Apporximation"? How can you compute it?

Question 15

Can the following equation

Question 16

When computing ∂V/∂r, what is the difference between "Central Approx- imation" and "Forward Approximation"? Which one is closer to the true value?

Question 17

How can you compute theta?

Question 18

What is a range floater?