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Old 02-05-2018, 07:07 PM
Gilgamesh Gilgamesh is offline
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Default Interest Rate and Bond Derivatives chapter - important takeaways?

I have looked at some sample problems/solutions from past exams, and a few of the problems require you to use closed-form solutions for Vasicek and CIR Models that are very ugly and would be a nightmare to memorize. This is the case for CIR in particular, whereas the Vasicek solution isn't nearly as bad.

The ugliness of the CIR solution gives me slight skepticism that these kinds of problems will actually be found on the March 2018 exam. Overall, can someone confirm whether or not I should spend significant time on this material, and/or what the most important takeaways from this chapter are?

Thanks for your help.

Last edited by Gilgamesh; 02-05-2018 at 07:10 PM.. Reason: slight wording touch up
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Old 02-05-2018, 07:30 PM
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If it's in the syllabus, it's fair game. Can you derive it from initial principles, memorize bits and pieces and re-assemble, etc.? I remember being burned a few times with this line of reasoning.

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Old 02-05-2018, 07:52 PM
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Quote:
Originally Posted by Gilgamesh View Post
I have looked at some sample problems/solutions from past exams, and a few of the problems require you to use closed-form solutions for Vasicek and CIR Models that are very ugly and would be a nightmare to memorize. This is the case for CIR in particular, whereas the Vasicek solution isn't nearly as bad.

The ugliness of the CIR solution gives me slight skepticism that these kinds of problems will actually be found on the March 2018 exam. Overall, can someone confirm whether or not I should spend significant time on this material, and/or what the most important takeaways from this chapter are?

Thanks for your help.
Vasicek and CIR interest rate models are no longer on the current syllabus. You are only responsible for pricing interest rate derivatives under a binomial tree for interest rates, including the Black-Derman-Toy tree. Also, you need to know how to price interest rate caplets, floorlets and bond calls and puts by applying the Black formula.
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