EOM Exercise

[alben]

I'm having a total mental block - how to you calculate the monthly hedging errors? I referred to Investment guarantees book, but what I get from it doesn't seem to be what you guys are doing... Is there a different source explaining it that I missed? Thanks!

[sweetie]

Originally Posted by runsc

How many pages of reading are in this module?

I don't count the pages, but the required reading in the Investment book is slowing me down. I only started chapter 8 today

[alben]

Originally Posted by alben

I'm having a total mental block - how to you calculate the monthly hedging errors? I referred to Investment guarantees book, but what I get from it doesn't seem to be what you guys are doing... Is there a different source explaining it that I missed? Thanks!

Never mind, I found it, Ch.8. I match the books numbers, but not those mentioned earlier in this thread... We are given volatility of 0.18, why are you using 5.2%?

[White Castle]

Originally Posted by runsc

How many pages of reading are in this module?

I got about 600, but it will be a little high because I counted whole chapters (so if you skip an appendix or there is a blank page it still counted).

[balsampear]

Originally Posted by leathercost

Does anyone get 67.75 for the initial cost of hedge?
I also got -2.46 for the present value of hedge error for scenario 1 of RSLN model. In addition, I got 0 hedge error at maturity no matter which scenario and which model are used. That's little weird.

I got the same initial cost 67.751, but my NPV is -3.41331, anyone have the same result as mine. btw, mean of the all 50 scenarios for RSLN model is over 57, which doesn't make sense to me. I must made a mistake somewhere, anyone any give me a hint?

[balsampear]

I got -2.45 finally. correct one formula. hehe.

Originally Posted by leathercost

Does anyone get 67.75 for the initial cost of hedge?
I also got -2.46 for the present value of hedge error for scenario 1 of RSLN model. In addition, I got 0 hedge error at maturity no matter which scenario and which model are used. That's little weird.

[amimal]

I am one of the others that got caught up reading over everything....just getting to the EOM exercise now.

Question for someone that has gone throught it already...are you telling me that this exercise pretty much relates to only the last few sections of the module, or am I missing something?

Comments and suggestions are welcome...thanks all

amimal

[ReddEye]

Originally Posted by amimal

Question for someone that has gone throught it already...are you telling me that this exercise pretty much relates to only the last few sections of the module, or am I missing something?

I'm in the middle of section 9 and I've also read over the EOM exercises a few times. Nothing relavent to the exercise so far. I believe the crux is in chapter 8 of Mary's book.

[pilotfish]

OK - anyone else lagging behind a bit? I've come up with what appears to be the right initial cost of the hedge of 67.75. I'm afraid I have no idea how to determine how much of the hedge is the stock and how much is the bond, other than I realize the difference needs to be 67.75. Last I checked, the equation B - S = 67.75 has roughly infinite solutions.

I'm hoping this is a dumb question that I figure out immediately after posting ... I get the sense that it might be.

I understand the concept on the hedging errors, but I'm stuck back at this step.

Any help? Or fellow struggling stragglers?

[Constantinople]

Hi All,

I have a question on Task 1 of the EOM exercise. It asked us to describe the differences in the two models. Obviously, the major difference is that RSLN model produced a fatter tail (with more poor extreme results) than that of the LN model.

Than it asked us to indicate why one model is more conservative to evaluate the GMMB liability risk than the other, and it stated that it used LN model in pricing (which I guess it implied that LN model is more conservative).

My question is, if RSLN produced fatter tail, why aren't RSLN model being more conservative than LN model and being used in pricing?

Please help!!