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Financial Mathematics Old FM Forum

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Old 11-08-2017, 11:08 PM
Futon Futon is offline
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So I don't really understand the solution. How is the cost H/1.1 + I/1.2321 + J?

Why is it 1.2321 and not 1.1^2? Why is J not multiplied by anything?
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Old 11-09-2017, 12:29 AM
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Originally Posted by Futon View Post




So I don't really understand the solution. How is the cost H/1.1 + I/1.2321 + J?

Why is it 1.2321 and not 1.1^2? Why is J not multiplied by anything?
1.2321 = 1.11^2. J is selling at par so the cost of face amount J is J.

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Old 11-10-2017, 03:14 PM
Futon Futon is offline
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1.2321 = 1.11^2. J is selling at par so the cost of face amount J is J.

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Thanks.

Yea sorry looks like I tripped up. I don't see a use of this equation either, so what is the point of it?

And what exactly is being minimized and why?

Last edited by Futon; 11-10-2017 at 03:37 PM..
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Old 11-10-2017, 04:05 PM
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Thanks.

Yea sorry looks like I tripped up. I don't see a use of this equation either, so what is the point of it?

And what exactly is being minimized and why?
You are minimizing the cost of the cash flow matching portfolio. It is something actually done in the real world although it is accomplished with large scale linear programming.
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Old 11-10-2017, 04:14 PM
Futon Futon is offline
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You are minimizing the cost of the cash flow matching portfolio. It is something actually done in the real world although it is accomplished with large scale linear programming.
Okay so what do people look for when solving for the smallest amount? In other words, why does the problem desire the biggest amount of J?
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Old 11-10-2017, 04:35 PM
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Okay so what do people look for when solving for the smallest amount? In other words, why does the problem desire the biggest amount of J?
J has the highest yield, so it would provide the lowest cost asset. Now in the real world it would have the higher yield due to things like credit risk which is ignored on the fm exam.
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Old 11-10-2017, 04:40 PM
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J has the highest yield, so it would provide the lowest cost asset. Now in the real world it would have the higher yield due to things like credit risk which is ignored on the fm exam.
So I would pick the two highest yields of each year right? I has bigger yield than H but picking I and J would be impossible?
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