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Howard Mahler
05-02-2007, 02:37 PM
The CAS Exam 3 for Spring 07 has been posted.

Those taking MFE might want to look at the questions on Financial Economics,
since they are our first example of actual exam questions on this subject.

Skip question 36.

I would skip poorly worded statement III of Q. 33.

Q.35 should read S(t) = S(0) exp[(alpha - delta - sigma^2/2)t + sigma Z(t)].
Where the sigma Z(t) is inside the exponential.

Financial Economics: 3, 4, 12-17, 20-21, 32-37.

Life Con.: 5-9, 24-27, 38-39.

Stochastic Models: 1, 2, 28, 40.

Statistics (CAS only): 10, 11, 18, 19, 22, 23, 29-31.

Howard Mahler

mmamin
05-03-2007, 01:59 PM
would somebody be kind enough to give the complete solutions to the CAS 3 exam administered, it would certainly help all of those taking the exam on May 17th. If not for the whole exam, atleast the MFe part/questions that Mahler mentioned above

nittanylions
05-03-2007, 02:05 PM
I found most of them to be pretty straight-forward. I don't particularly feel like posting every solution, but if you have any questions on a specific problem, I'll try my best to post a clear solution.

nkt
05-03-2007, 02:28 PM
I get that sigma = .2 and K = 40 but I don't get the final answer. In fact, do we use the profit formula:
Profit=-[C(S1)-C(S0)] + delta*(S1-S0) - (exp(r/365)-1)*(delta*S0-C(S0))?
If so, then the first term, the difference in the call prices is given to us to be \$56.08 and i calculated delta=.54014 and C(S0)=3.32681. If I substitute in the above equation, I don't get the answer.

Could anyone help me with what I am doing wrong; thanks a lot.

nittanylions
05-03-2007, 02:41 PM
My understanding of the problem is that the stock increased by \$1 immediately, so the price of one call option increased by \$56.08. Since the market-maker sold 100 call options, the first component of his profit is a loss of \$56.08 * 100 = \$5608.

Next, I figured out that delta = e^-divrate*T*N(d1) = e^-.07*.5793 = .5401
Therefore, in order to delta-hedge, he purchases .5401 * 100 (shares per option) = 54.01 shares of stock PER OPTION he sold. Since he sold 100 options, he purchases 54.01 * 100 = 5401 shares of the stock. The \$1 increase in stock price therefore increased the market makers profit by \$5401 (the numbers of shares owned * the increase).

Since the stock price increase was immediate, no interest is paid on the borrowed amount.

Profit = -5608 + 5401 - 0 = -\$207

This coincides with answer choice C (between -800 and 0 dollars).

nkt
05-03-2007, 02:51 PM
Thanks nittanylions! Your solution makes sense. There is a bit of too much information in this problem though, which ends up unused. I guess that confused me.

KingWithoutACrown
05-03-2007, 03:05 PM
Now if the SOA exam looks similiar to this, then I'll be a happy camper.

GeekGoddess
05-03-2007, 03:30 PM
Thanks nittanylions! Your solution makes sense. There is a bit of too much information in this problem though, which ends up unused. I guess that confused me.

I have a feeling that is how most of the questions will be. At least that is what I have noticed in doing the Derivatives markets problems.

CaptainAwesome
05-04-2007, 11:17 AM
Now if the SOA exam looks similiar to this, then I'll be a happy camper.

Agreed. There's no way MFE can be that easy...is there? I thought that CAS exams, as a rule, are harder.

jenn3539
05-04-2007, 11:24 AM
Agreed. There's no way MFE can be that easy...is there? I thought that CAS exams, as a rule, are harder.

Well, there were three other topics on the exam, too.

Howard Mahler
05-06-2007, 11:33 AM
Professor Broverman has posted his solutions to the CAS 3 Exam.

http://www.sambroverman.com/07s-cas3sol.pdf