TIA’s Exam MFE Blog

I created a lesson for that last sitting, actually, but it never got produced. I’ll be creating a better one soon for this sitting, however.

Day asked me if I didn’t mind starting later so we could stagger the beginnings so he can be available to help.

So we’re starting at 9am Friday and we’ll decide what we want to do the rest of the weekend after that.

I apologize to anyone who doesn’t see this and shows up at 8 by mistake…

Bill Cross

Let’s plan to start at 8am Friday. We may be able to sleep in Saturday and/or Monday, but let’s get a good start Friday morning.

Bill Cross

Two things to note in this lesson:

(1) When discussing Cox-Ross-Rubinstein trees, I forgot to include the continuous dividend in the formula for p*. This formula is, as it has been for all of the trees discussed up to this point, (e^(r-delta)h - d)/(u-d).

(2) McDonald is silent on the issue, and the lesson was recorded before the SOA put up the first practice exam, but my recollection is that the problem the SOA posted implied that there are 365 days in a year. I would hope that they would make this clear one way or the other if it comes up on the exam. The reason I bring this up is that in my formulas I used 252, the commonly assumed number of TRADING days in a year (no Saturdays, Sundays or holidays).

Because for this sitting we have a little extra time to play with, I was wondering whether people would prefer to start at 8am, take a leisurely lunch and end the day early or else start at 9am and get some extra sleep on Friday, Saturday, Monday, and Tuesday? I’m flexible.

I will be on vacation for the rest of the week, but I wanted to let everyone know that I have submitted videos for Day to edit through the end of section C (the material in chapters 9 through 12). I apologize for the delay - there were some technical glitches we needed to work out - but Day has promised me that he is working on editing and posting them to update the site.

It appears that the real-world probability is actually 102%.  I messed up the formula in my spreadsheet at home.  My apologies.

I have created lessons regarding the new material (for those at my live seminar, that’s “Unit 13″) about valuing a claim on S^a.  Unfortunately, it appears that they have not yet been edited.  I apologize for this.

Day is going to be bringing the printed problem sets with him to my seminar Thursday, so those of you who are concerned you haven’t received anything have nothing to worry about.  Apparently we have a deal with Kinko’s.

Here is the projected schedule:

Each day we will begin at 8am, break for lunch, and continue until the daily material is finished.  I expect that we will finish before 5pm each night, but regardless, we will definitely stop at 6pm.  Sunday, I expect to finish by noon.  There are 10 practice problems in each unit, and each evening you will be given 20 practice problems to work on your own if you so desire.  Depending on demand, a “study hall” may be made available as well each evening.

Thursday Morning, Units 1-3:

Unit 1:              Basic put-call parity; duality between a call and a put, and an application to currency options.

Unit 2:              American options, and implications regarding early exercise from put-call parity; properties of option prices based on the no-arbitrage model.

Unit 3:              The basic 1-period binomial stock model.

Thursday Afternoon, Units 4-6:

Unit 4:              The basic multi-period binomial stock model.

Unit 5:              The basic binomial model for alternative assets, and alternative binomial models.

Unit 6:              Additional topics for binomial models:  real-world return, discrete dividends, and estimating volatility.

Friday Morning, Units 7-9 (or 10):

Unit 7:              The Black-Scholes formula.

Unit 8:              The Greeks, elasticity, the Sharpe ratio, and implied volatility.

Unit 9:              Exotic Options, Part 1:  exchange options and gap options.

Friday Afternoon, Units 10 (or 11)-13:

Unit 10:            Exotic Options, Part 2:  Asian options, barrier options, and compound options.

Unit 11:            An introduction to stochastic differential equations.

Unit 12:            Ito’s Lemma.

Unit 13:            A way around Ito’s Lemma in common special cases, and valuing a claim on S^a.

Saturday Morning, Units 14-16 (or 17):

Unit 14:            An introduction to discrete interest-rate models.

Unit 15:            The Black-Derman-Toy interest-rate model.

Unit 16:            The Black Formula and valuing a caplet or floorlet.

Saturday Afternoon, Units 17 (or 18)-20:

Unit 17:            The “impossible” interest-rate model; the Vasicek and CIR interest-rate models.

Unit 18:            The Basics of Delta-Hedging (and the delta-gamma approximation).

Unit 19:            The profit formula for a hedged portfolio.

Unit 20:            Pep talk and 2-minute drill.

Sunday Morning:

Thursday evening practice problems (1-20).

Friday evening practice problems (21-40).

Saturday evening practice problems (41-60).

For those of you coming to the live seminar:  I am hoping to have e-mailed to you (via Day) about 200 problems to bring with.  I also recommend bringing the McDonald text, a calculator and whatever normal other study materials you normally have handy (pens/pencils, paper…).  I intend to start each morning at 8am sharp and to run no later than 6pm (Thursday, Friday, and Saturday) and noon (Sunday) if at all possible.

A few of you have discovered errors in problem set E.1.3.

#6:  Should have S1(0) = 2

#7:  Final solution should read

…so that means S₂(6) ~ N(1.33, 0.9216) + N(0.2, 0.5) = N(1.53, 1.4216) because of independence.

(Changes in bold italics)

#8:  rho should be +0.5, not +0.4