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View Full Version : 2007 APMV Question #4 (a) Solution....?


The Smokin' Cracktuary
04-19-2008, 02:21 PM
All I can really say here is.....

WTF!?!?!

The Smokin' Cracktuary
04-19-2008, 02:35 PM
Ok. So how are we supposed to know they want a picture, not a mathmatecial representation?

Does it matter?

I guess LIBOR is only to be used as the forward curve to calculated the value?

I obviously am a moran, but I interpereted the question completely differently than they intended.

I took the fixed rate as the return on the equity return reciever's portfolio of assets, and then assumed he payed LIBOR in the sawp. Of course I assumed a spread (that they didn't give you) on the LIBOR.

I understand that wasn't how they meant it, but I don't see any reason (big reason anyway) to not see it the way I did.

Either way, I wrote formulas for the cash flows at each time step, I didn't draw a picture. If they wanted a picture, they should have asked. And yes, I know they said "illustrate", but I have done a few questions that said "illustrate" and they were calculation type questions.

Ok, I am done ranting. I know it was only a couple of point on the whole exam, but still.

hamstrman
05-03-2008, 08:30 PM
Ok. So how are we supposed to know they want a picture, not a mathmatecial representation?

Does it matter?

I guess LIBOR is only to be used as the forward curve to calculated the value?

I obviously am a moran, but I interpereted the question completely differently than they intended.

I took the fixed rate as the return on the equity return reciever's portfolio of assets, and then assumed he payed LIBOR in the sawp. Of course I assumed a spread (that they didn't give you) on the LIBOR.

I understand that wasn't how they meant it, but I don't see any reason (big reason anyway) to not see it the way I did.

Either way, I wrote formulas for the cash flows at each time step, I didn't draw a picture. If they wanted a picture, they should have asked. And yes, I know they said "illustrate", but I have done a few questions that said "illustrate" and they were calculation type questions.

Ok, I am done ranting. I know it was only a couple of point on the whole exam, but still.

Haha! I did the exact same thing with the fixed for LIBOR! Also I did a mathematical "illustration", not an actual picture. This incorrect assumption of fixed for LIBOR certainly made part B more difficult without a discount rate that was distinct from the coupon payment... It's good to know I'm not the only one.

The Smokin' Cracktuary
05-04-2008, 10:48 AM
Haha! I did the exact same thing with the fixed for LIBOR! Also I did a mathematical "illustration", not an actual picture. This incorrect assumption of fixed for LIBOR certainly made part B more difficult without a discount rate that was distinct from the coupon payment... It's good to know I'm not the only one.

Exactly. I just skipped the second part.

Eroboy
05-08-2008, 03:47 PM
The thing strikes me for this problem is that SOA does not clarify what LIBOR curve it provided.

It seems this is a forward LIBOR curve at day 30 not the initial zero LIBOR curve. I actually treated it as a zero LIBOR curve and derive all the forward rates used in the discounting.

I hope SOA can clarify all the confusing things, such as,

What curve you provide (zero or forward)?

When you talk about equity return (mu), is it based on GBM or Hardy's definition (LN)? It just seems to me that currently, it just uses the mu in the corresponding context without clarification. This can lead to different stock return process.

When you say default intensity, do you mean the continuous version, or the discrete version?