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?
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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:
_T}=\frac{y(1,T,r_u )}{y(1,T,r_d)})
So for #29, we have:
_3}=\frac{y(1,3,r_u )}{y(1,3,r_d)}\hspace{10})
and the answer turns out to be
_3=0.26)
And for #30, we have:
_2}=\frac{y(1,2,r_u )}{y(1,2,r_d)}\hspace{30})
and we are given that
_2}=0.10)
Quote:
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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.
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If they give you the volatility in year 1 of a 2-year zero-coupon bond, then you have
. For #30, we make use of the fact that:
_2=0.10)
Note that this is not true for the other sigmas though:
_3)
_4)
07-20-2010, 02:55 PM
Volatility in year 1 of a BDT tree
Linear Mode
