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2. Girsanov's Theorem

Hi danghara, •In time step t the volatility sigma becomes, σ^2 (∆t) =E(S^2 ) -[E(S)]^2 =p(u-1)^2+(1-p) (d-1)^2-(p(u-1)+(1-p)(d-1))^2 σ^2 (∆t) =E(S^2 ) -[E(S)]^2 =p(1-p)(u-1)^2+(1-p) [p(d-1)]^2-2p(1-p)(u-1)(d-1) =>p(1-p) (u-d)^2=σ^2 (∆t) =>σ^2 (∆t)=(e^r∆t-d)(u-e^r∆t ) ⇒e^r∆t...
3. Girsanov's Theorem

Hi, Girsanov's theorem states that when moving from the risk-neutral world to the real world and vice versa the volatility of the asset remains the same. thanks
4. Does anyone has Fixed Income for Mathematics Fabozzi pdf.

Does anyone has Fixed Income for Mathematics Fabozzi pdf.

6. Jensen's Alpha Formula - Please Confirm

Hi, The version 1 seems correct. The formula is Jensen's Alpha= Expected Return (portfolio) - (Risk Free Rate + Beta (portfolio) [Expected Return (Market) - Risk Free Rate]) WE compare the portfolio return Expected Return (portfolio) and the CAPM implied portfolio return Risk Free Rate + Beta...
7. Mortgage refinance

Hi, here find first find the monthly payment with old mortgage as: MP1 = (250,000*(5%/12))/(1-1/(1+5%/12)^360)= 1342.054 the monthly payment with new mortgage as: MP2 = (250,000*(4%/12))/(1-1/(1+4%/12)^360)=1193.5382 Thus the monthly savings = MP1-MP2 = 1342.054-1193.5382=\$ 148.5158. thanks
8. Deriving PD

Hi, PD is a Bernoulli random variable therefore if 1 is the default state and 0 is the no default sate then E(PD)=PD.1+(1-PD).0=PD and the variance(PD) = PD.(PD-1)^2+(1-PD).(PD-0)^2 variance(PD) = PD(1-PD)^2+PD^2.(1-PD) = PD.(1-PD)(1-PD+PD)=PD(1-PD). We know that the variance of PD=sigma...
9. Test for significance of correlation vs significance of beta (regression slope)

hi, we test for significance of correlation to test whether the linear relationship between the dependent and independent variable is strong enough to use the model for the projection. significance of the slope in a simple linear regression is used to check whether the slope coefficients are...
10. FAQ Before Exam Can all of the materials in the study planner be downloaded at once?

Hi, Yeah I agree with srini above it would be helpful to the users if all the files can be downloaded as a single zip file. It would be difficult downloading many files rather than just a single zip in one go. thanks

12. Determination of "Cheapest To Deliver"- Bonds

Hi, Just to give an idea, If S is the value of the T-bonds, as the rates decline the value of S increases whereas if rates increase the value of S decreases. Since the T-bond futures value=S*exp(rT) ,r is the risk free rate and T is the time to maturity ,thus if S increases(rates decline) the...
13. Multiple regression

Hi, David Harper CFA FRM your example really clarifies a lot better :). thanks
14. Multiple regression

Hi, For e.g. if the regression equation is y=b0+b1*x1+b2*x2+b3*x3 , suppose initial values of regressor be x1=a,x2=b and x3=c where a,b,c are constants so that the value of dependent variable y is y= b0+b1*a+b2*b+b3*c ...(1) Now suppose we change the regressor x1 to new value x1=a' while...
15. In Reference to R20.P1.T3.FIN_PRODS_McDonald_Ch6_Topic: Arbitrage Transaction in Commodity Forwards

Hi, Formula I: E(St) = (S0). e ^ (Commodity Discount Rate) Both are correct except that for formula I the Lease Rate=0 => Commodity Discount Rate= Expected Growth Rate => E(St) = (S0). e ^ ( Expected Growth Rate) is the Formula II. thanks
16. P1.T1 Excel Elton_Ch13 Tab - Elton Chapter 13

Ri=Beta*Rm+intercept Covariance(Ri,Rm)=Beta*Covariance(Rm,Rm)=Beta*Variance of market Covariance= Beta*Variance of market Variance of market=volatility of market^2=11.68%^2 for weight of A=160% and weight of B=-60% Beta=.061 Covariance= Beta*Variance of market Covariance= .061*11.68%^2 = 0.001...
17. In Reference to R20.P1.T3.FIN_PRODS_McDonald_Ch6_Topic: Arbitrage Transaction in Commodity Forwards

hi, The lease rate would lower the spot price growth so that if the asset grows at 6% then lease rate would lower the growth by 1%. Commodity discount rate would take the total return return due to growth rate and the return due to lease rate. discount rate=growth rate+lease rate => growth...
18. Binomial tree

Hi, p=(exp(.12*.25)-0.90)/(.20) [3.20*(exp(.12*.25)-0.90)/(.20)+0*(1-(exp(.12*.25)-0.90)/(.20))]*exp(-.12*.25) = 2.0256 (checked this formula in excel its coming exactly 2.0256) yes its due to rounding. thanks
19. Credit Exposure

1) Credit exposure to party A is the positive MTM that is the value of a derivative contract to the party A-value of contract to the counter party and as the value of the derivative changes with the movement of the interest rates or Forex rates to both the counter-parties MTM changes, if it...
20. P1.T1. Help me understand how hedging is disadvantageous by reducing true economic value which ....

Hi, Yes for e.g. if a firm sales X pound copper per year then the value of the firm(PV of the sales of copper) is fixed by hedging as the price at which the copper is sold is fixed through hedging therefore the economic value variability is reduced here through hedging,but the accounting...