Actuarial Outpost
 
Go Back   Actuarial Outpost > Exams - Please Limit Discussion to Exam-Related Topics > SoA/CAS Preliminary Exams > Investment / Financial Markets
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Actuarial Jobs by State

New York  New Jersey  Connecticut  Massachusetts 
California  Florida  Texas  Illinois  Colorado


Investment / Financial Markets Old Exam MFE Forum

Reply
 
Thread Tools Search this Thread Display Modes
  #1  
Old 04-11-2017, 02:54 AM
DansGinger DansGinger is offline
Member
CAS SOA
 
Join Date: Jan 2017
Posts: 170
Default New MFE manual (Am I tackling the exam wrong)

I feel like my study approach just isnt working and I'm not sure how to go about studying for this exam.

It seems like every page I go to, I am super confused about what the author is doing (I am using the new ASM manual btw). For example, page 117, the formula (delta = (C_u - C_d)/(S(u-d))*e^(-delta * h)) makes no sense to me. Furthermore, on page 120, the whole calculating variance of ln(u) and ln(d) and using Bernoulli variables makes no sense. Am I missing something crucial?

Chapter 7 was also really confusing and although I read the whole chapter, I probably only understood about 60% of it.

Any tips of how to tackle this exam? Much appreciated..
__________________
Good Life Quotes:

Spoiler:

"You have proven inferiority by displaying superiority in an inferior field" - me in real life.


Reply With Quote
  #2  
Old 04-11-2017, 11:13 AM
The Disreputable Dog's Avatar
The Disreputable Dog The Disreputable Dog is online now
Member
CAS
 
Join Date: Dec 2011
Studying for prelims
College: Somersby School
Favorite beer: Worldwide Stout
Posts: 906
Default

Do you have the textbook to supplement your reading? I thought McDonald did a nice enough job explaining many of the concepts.

RE: the formula for delta, I find the concept of delta easiest to remember graphically. It's the slope of a line which connects two points on an option payoff chart. Particularly in the binomial model for stocks, we're only ever looking at two possible values of St at a time (Su and Sd). Each of those corresponds to two different payoff amounts for the option (Cu and Cd for a call). Skipping over the issue of why a line between them works, you can draw a line between those two points. The slope of that line is the rise/run, or (change in payoff)/(change in stock).

The above omits the e^(-δh), and I remember it that way intentionally. I've found it much much easier to keep track of things if you use subscripts on delta and beta. So I remember Δf = (Cu-Cd)/(Su-Sd) for the future number of shares - which is what you're looking for when you're evaluating payoffs, since they happen at expiration. To get Δp you just pull it back to the present value of those shares. Which you do using e^(-δh) for shares of a stock.

Bf = (u*Cd - d*Cu)/(u-d) for the future amount of a risk-free investment or loan. Bp = e^(-rh)*Bf for the present value.

Neither McDonald nor ASM seem to go with the subscripts, but I find them really useful. It also simplifies the formulas for delta and beta just a little bit since you can jettison the mechanism that moves them back and forth in time.
Reply With Quote
  #3  
Old 04-11-2017, 04:04 PM
dqbrooks14 dqbrooks14 is offline
Member
Non-Actuary
 
Join Date: Sep 2016
Posts: 43
Default

Delta didn't make sense to me until I learned what it actually was in terms of being an option Greek. It's definition is dV/dS which is exactly what the formula you gave is in a discrete time sense discounted back to present value.
Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off


All times are GMT -4. The time now is 03:51 PM.


Powered by vBulletin®
Copyright ©2000 - 2018, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.19432 seconds with 11 queries