Actuarial Outpost > MFE Volatility in year 1 of a BDT tree
 Register Blogs Wiki FAQ Calendar Search Today's Posts Mark Forums Read
 FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Meet Lindsey Nelson, Senior Recruiter at DW Simpson

#1
07-20-2010, 02:55 PM
 Candy Holiday Member Join Date: Jul 2010 Posts: 858
Volatility in year 1 of a BDT tree

Hi everyone. I need some advice here. Please see sample questions #29 and #30. Both questions reference volatility in year 1 but they mean two different things depending on the question you're reading. My question is, how the hell am I supposed to know what the hell they are talking about if they say "volatility in year 1" on the exam? Does anyone know if they are extra anal about making the distinction on the exam? Right now I'm thinking if they give me volatility of year x then I'll need to assume they are giving me the sigma(x) parameter in the tree and if they ask me to compute it then they are asking for the other version.
#2
07-20-2010, 03:27 PM
 Actuarialsuck Member Join Date: Sep 2007 Posts: 5,328

I'm not sure what you mean, they ask for 2 different things. How would you re-phrase them?
__________________
Quote:
 Originally Posted by Buru Buru i'm not. i do not troll.
#3
07-20-2010, 11:08 PM
 brandond Member Join Date: May 2008 Location: Kansas Studying for 3/MFE Posts: 249

Not really qualified to answer yet seeing I am not that far along in the material yet. However, in the sample questions, at the end of problem 29, they make a remark about what you are asking.
#4
07-21-2010, 05:42 PM
 Joe F Member Join Date: May 2007 Posts: 170

Quote:
 Originally Posted by Candy Holiday Hi everyone. I need some advice here. Please see sample questions #29 and #30. Both questions reference volatility in year 1 but they mean two different things depending on the question you're reading. My question is, how the hell am I supposed to know what the hell they are talking about if they say "volatility in year 1" on the exam?
They both refer to the yield volatility. Question #29 refers to the yield volatility of a 3-year bond, and Question #30 refers to the yield volatility of a 2-year bond.

The yield volatility for a T-year bond can be found using the ratio of the 2 possible yields on the bond that can occur at the end of 1 year:
$\hspace{30}e^{2(YieldVolatlity)_T}=\frac{y(1,T,r_u )}{y(1,T,r_d)}$

So for #29, we have:
$\hspace{30}e^{2(YieldVolatlity)_3}=\frac{y(1,3,r_u )}{y(1,3,r_d)}\hspace{10}$ and the answer turns out to be $(YieldVolatlity)_3=0.26$

And for #30, we have:
$\hspace{30}e^{2(YieldVolatlity)_2}=\frac{y(1,2,r_u )}{y(1,2,r_d)}\hspace{30}$and we are given that $(YieldVolatlity)_2}=0.10$
Quote:
 Does anyone know if they are extra anal about making the distinction on the exam? Right now I'm thinking if they give me volatility of year x then I'll need to assume they are giving me the sigma(x) parameter in the tree and if they ask me to compute it then they are asking for the other version.
If they give you the volatility in year 1 of a 2-year zero-coupon bond, then you have $\sigma_1$. For #30, we make use of the fact that:

$\hspace{30}\sigma_1=(YieldVolatility)_2=0.10$

Note that this is not true for the other sigmas though:
$\hspace{30}\sigma_2\neq(YieldVolatility)_3$
$\hspace{30}\sigma_3\neq(YieldVolatility)_4$

 Thread Tools Display Modes Linear Mode

 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 01:46 AM.

 -- Default Style - Fluid Width ---- Default Style - Fixed Width ---- Old Default Style ---- Easy on the eyes ---- Smooth Darkness ---- Chestnut ---- Apple-ish Style ---- If Apples were blue ---- If Apples were green ---- If Apples were purple ---- Halloween 2007 ---- B&W ---- Halloween ---- AO Christmas Theme ---- Turkey Day Theme ---- AO 2007 beta ---- 4th Of July Contact Us - Actuarial Outpost - Archive - Privacy Statement - Top