EOM Exercise

[hamstrman]

Originally Posted by hw0799

I feel the simulated value is more like St/St-1 instead of the LN (St/St-1), otherwise, the some monthly return are really too high.....

Plus, at month 24, the hedge ratio should be 1, isn't it? Thanks.

I agree. This is what I did. And what everyone else did as well. The values are St/St-1.

[sweetie]

Originally Posted by hw0799

at month 24, in theory the hedge ration is -1, dose it imply that stock position is 0, and bond position 1000, which give a hedge value of 1000? if not, any advice to realize that -1 hedge ratio? thanks.

You must have a different exercise than I did. The one I have only asks us to calc the hedging error. There's no need to calc the hedge ratio.

[sweetie]

Originally Posted by hw0799

hedge ratio is just N(d1). you have to calculate d1 anyway.

for the hedge cost at month 24, should it equal to garantee amount? how to deal with the hedge error at month 24? any suggestions? thanks.

Remember, here's the advice for the candidates:

"While you should address all the issues raised in this assignment, you should not add extraneous information just to demonstrate your knowledge of the module content; it is not possible, nor is it desirable, to work every fact or concept from the module into this exercise."

Yes, the hedge cost at month 24 is the GMMB. The formula for hedge error is the same for all months.

[hamstrman]

Originally Posted by hw0799

I have the same question. but I did not find that the task description said that the current used model LN is the conservative model.

RSLN is more conservative. You're saying how the assignment never said LN was more conservative, and didn't ask you to show that LN was more conservative. You make the assumption that LN must be more conservative because it's being used... why are you making this assumption? Everything is contrary to it. They used the less conservative model. So?

[bevowolf]

Originally Posted by hw0799

anybody the same as me? PM me . thanks.

For LN Model:
mean: -0.989476175
std: 14.71408399
CTE:
90%: 27.94200153
80%: 20.1096419


For RSLN model:
mean: 2.394881616
std: 25.40792861
CTE:
90%:58.9183332
80%: 43.72555389

I got very close to your numbers on the RSLN model but not on the LN. What was your NPV for the first run under the LN, mine was -14.034?

[hw0799]

my first LN model is:
-14.0032


here is my number:

LN:
mean:-2.420105652
std: 16.56172628

RSLN:
mean:2.280156333
std: 26.73366447

CTE:
LN:
90%:29.01960428
80%:20.46777

RSLN:
90%: 64.58074284
80%: 46.34432878

Originally Posted by bevowolf

I got very close to your numbers on the RSLN model but not on the LN. What was your NPV for the first run under the LN, mine was -14.034?

[bevowolf]

Originally Posted by hw0799

there are some error in my calculation, i correct some, my first LN model is:
-14.0032


here is my new number after correct my error:

LN:
mean:-2.420105652
std: 16.56172628

RSLN:
mean:2.280156333
std: 26.73366447

CTE:
LN:
90%:29.01960428
80%:20.46777

RSLN:
90%: 64.58074284
80%: 46.34432878

Thanks for the reply, our numbers are very close on both mean and std (rounding error).

But I am not sure how you got your CTEs? I sorted the results of my 50 runs in ascending order and for the 80% CTE I looked at the 45 run and got 13.38 (LN) and 45.57 (RSLN). I used the 45 run since it is in the 90th% and then adjust for two tails liked they talked about on page 160 of the Investment Guarantees book. Did I miss the mark here?

[Inigo Montoya]

I'm very close to hw0799's numbers as well. How did you calculate your discount factor? Did you use e^-rt or (1+i)^-t?

For CTE, check out page 165 of the Investment Guarantees book.

[bevowolf]

I think I got it, take the average of the top 10 results. Agree.

[Inigo Montoya]

Agreed.