can someone please explain problem 2,3 and 4 of Structured product section from the CAIA guide?
still not sure how did they get #2. I am fine with 3 and 4 now
Volatility for increase or decrease is 0.25 Riskfree rate is 1%. Find up neutral probability. I am getting close to 0.48 but answer given is 0.52. How?
I’ll let you know tomorrow night or Thursday morning when I do those problems!
Also #3 from Risk Managament section. I don’t see value of Beta in the problem (to calculate volatility by GARCH)
for q2 i get this pi =( e^rt -d) / (u-d) =e^0.01 -0.75 / 1.25-0.75 =0.52 i think thats right?
Don’t you use e^std dev first to find up and down probability?
i think you use e^std*sqrt(t) when you are calculating u u = e^std*sqrt(t), which is the predicted up move, rather than pi which is the risk neutral probability of an up move. in q2 u is given, so no need to calculate it does this make sense?
It does but there is no example in Uppermark related to this. I think I will have to go with this else will have to use value of the firm formula to derive the value of pi which may take couple of minutes.
Where do you get the std dev from? It’s not give in the question
check out p7, uppermark volume 2, it has the explanation there, you should only need to calculate pi using the value of assets in a risky corp debt q