# Correction & Exam Answers

Go to page : **1**, 2

**1** Correction & Exam Answers on Sat Jul 30, 2011 1:41 am

Hi Jack. This is Nuno from FTMA1 Class. Look, at the Lesson 6 calculations, when doing the Forward price with dividends paying, you post (T-t) for 10 months = 0.83. I think it's 0,803. Thanks

**2** Re: Correction & Exam Answers on Sat Jul 30, 2011 5:50 am

Interesting. I was actually confused by this since normally (in Dave's calculations) the time (T and t) is given in days. Then it's just a matter of dividing by 360. However this was given in months. So I did (10/12) because there are 12 months in a year (I'm not saying what I did was right though).

What did you do to get 0.803?

What did you do to get 0.803?

**3** Correction on Mon Aug 01, 2011 1:05 am

Forget it Jack, just did again, and it's 0,83. I made a mistake with the calculator. It's 300/360= 0.8(3).

Thanks anyway.

How are u going with Exam Calculations?

Cheers

Thanks anyway.

How are u going with Exam Calculations?

Cheers

**4** Re: Correction & Exam Answers on Mon Aug 01, 2011 4:09 am

Here's what I think so far:

Question 1: Easy - just use Google

Question 2: Easy, just don't get confused about who holds the repo and who holds the reverse repo.

Question 3: I think Dave's notes are incorrect. I'm pretty sure the International Fisher Effect states that the country with a higher interest rate will experience a devaluing of currency.

Question 4: Quite tricky. The only two scenarios I could think of are where a credit event occurs and where one doesn't.

Question 5: I think this is a difficult question because I think you need to understand the formula to explain what it's doing. Unless I've missed something?

Question 6: Plugin in the numbers and you're done.

Question 7: Long and lots of different versions of the same formula to use. Be careful with the negative percentage i.e. -(-0.01) is the same as +0.01

Question 1: Easy - just use Google

Question 2: Easy, just don't get confused about who holds the repo and who holds the reverse repo.

Question 3: I think Dave's notes are incorrect. I'm pretty sure the International Fisher Effect states that the country with a higher interest rate will experience a devaluing of currency.

**Anyway - double check your answer on this against Google and Dave's notes!**Question 4: Quite tricky. The only two scenarios I could think of are where a credit event occurs and where one doesn't.

Question 5: I think this is a difficult question because I think you need to understand the formula to explain what it's doing. Unless I've missed something?

Question 6: Plugin in the numbers and you're done.

Question 7: Long and lots of different versions of the same formula to use. Be careful with the negative percentage i.e. -(-0.01) is the same as +0.01

**5** Re: Correction & Exam Answers on Mon Aug 01, 2011 8:07 am

Send me ur email, we could cross some results in the calculations.

**6** Re: Correction & Exam Answers on Mon Aug 01, 2011 8:24 am

I'm happy to post my answers on this forum, if you let me know which ones you would like to check. Just because I would rather share any working I have with everyone. Also people can suggest where I have gone wrong!

**7** Re: Correction & Exam Answers on Tue Aug 02, 2011 3:41 am

No problem Jack.

Can you help me with the question 10b...the one about correlation?

For 6b i got DR= 12%, DP=0.988, DDA= 375.

7b) 1- 14.37

2- 9.58

3- 16.43

4- 10.45

5- 12.78

6- 8.85

8b) f= 100.313

Profit= 24.68

Cheers

Can you help me with the question 10b...the one about correlation?

For 6b i got DR= 12%, DP=0.988, DDA= 375.

7b) 1- 14.37

2- 9.58

3- 16.43

4- 10.45

5- 12.78

6- 8.85

8b) f= 100.313

Profit= 24.68

Cheers

**8** Re: Correction & Exam Answers on Tue Aug 02, 2011 4:48 am

6B)

Discount Rate: 12%

Discount Price: 0.988125

Dollar Discount Amount: 375

7B)

Share Price 8%, no growth: £14.38

Share Price 12%, no growth: £9.58

Share Price 8%, 1% growth: £16.43

Share Price 12%, 1% growth: £10.45

Share Price 8%, -1% growth: £12.78

Share Price 12%, -1% growth: £8.85

8B)

Forward Price of contract: $100.31

Profit due to Forward Contract: $24.69

Dividend paying security Forward Price: $11.64

9B)

Par bond: $99.86

Discount bond: $975.79

Premium bond: $5147.41

10B)

I'm doing this again.

Discount Rate: 12%

Discount Price: 0.988125

Dollar Discount Amount: 375

7B)

Share Price 8%, no growth: £14.38

Share Price 12%, no growth: £9.58

Share Price 8%, 1% growth: £16.43

Share Price 12%, 1% growth: £10.45

Share Price 8%, -1% growth: £12.78

Share Price 12%, -1% growth: £8.85

8B)

Forward Price of contract: $100.31

Profit due to Forward Contract: $24.69

Dividend paying security Forward Price: $11.64

9B)

Par bond: $99.86

Discount bond: $975.79

Premium bond: $5147.41

10B)

I'm doing this again.

Last edited by Admin on Wed Aug 03, 2011 6:21 am; edited 7 times in total

**9** Re: Correction & Exam Answers on Tue Aug 02, 2011 10:33 am

My Expected Return numbers are the same, but i'm getting big numbers for Company A Standard Deviation and Variance.

I think that 100 value for Possible Return is messing the formulas.

Cause when calculating the Expected Return, the number you get is 10.2,but that's not a percentage.

The numbers in the Final Exam for Probability and Possible Return,are numeric or percentage? I think it's not clear...some confusion with that.

I think that 100 value for Possible Return is messing the formulas.

Cause when calculating the Expected Return, the number you get is 10.2,but that's not a percentage.

The numbers in the Final Exam for Probability and Possible Return,are numeric or percentage? I think it's not clear...some confusion with that.

**10** Re: Correction & Exam Answers on Tue Aug 02, 2011 8:53 pm

Before jumping into Standard Deviation, why don't you post your numbers for Variance and see how much they differ?

Last edited by Admin on Wed Aug 03, 2011 6:47 am; edited 1 time in total

**11** Re: Correction & Exam Answers on Tue Aug 02, 2011 10:34 pm

hi! could you explain me the number 7 because i have opposite answers..

**12** Re: Correction & Exam Answers on Tue Aug 02, 2011 11:47 pm

Hi,

I will post my full answer and explanation for number 7 when I get home from work this evening if you can hold on until then!

Jack

I will post my full answer and explanation for number 7 when I get home from work this evening if you can hold on until then!

Jack

**13** Re: Correction & Exam Answers on Wed Aug 03, 2011 12:01 am

thank u very much Jack!

Also, for the number 9, how u get price when is semiannual?

Also, for the number 9, how u get price when is semiannual?

**14** Re: Correction & Exam Answers on Wed Aug 03, 2011 12:03 am

Ugh, number 9 sucks because all of Dave's examples are for annual payments. For semi annual you must divide both the coupon rate and discount rate by 2. So the rate per period for the coupon and discount rate is 2% for the first example.

From memory example 1 would be:

Coupon rate = 4/2 (2%)

Discount rate = 4/2 (2%)

Nominal = $100

Paying: Semi-annually

Coupon payments: 100*0.02 = $2

There will be 4 coupon payments that must be discounted to find the present value:

C1 = 2/(1.02^1)

C2 = 2/(1.02^2)

C3 = 2/(1.02^3)

C4 = 2/(1.02^4)

Finally the principle (face value, nominal) must be discounted

DiscountedFaceValue = 100/(1.02^4)

Then just add them all together:

C1 + C2 + C3 + C4 + DiscountedFaceValue

Also, since the Discount Rate and Coupon rate are the same, this will be a par bond.

I don't think semi-annual discounting was covered in the notes - which is extremely unhelpful.

From memory example 1 would be:

Coupon rate = 4/2 (2%)

Discount rate = 4/2 (2%)

Nominal = $100

Paying: Semi-annually

Coupon payments: 100*0.02 = $2

There will be 4 coupon payments that must be discounted to find the present value:

C1 = 2/(1.02^1)

C2 = 2/(1.02^2)

C3 = 2/(1.02^3)

C4 = 2/(1.02^4)

Finally the principle (face value, nominal) must be discounted

DiscountedFaceValue = 100/(1.02^4)

Then just add them all together:

C1 + C2 + C3 + C4 + DiscountedFaceValue

Also, since the Discount Rate and Coupon rate are the same, this will be a par bond.

I don't think semi-annual discounting was covered in the notes - which is extremely unhelpful.

**15** Re: Correction & Exam Answers on Wed Aug 03, 2011 5:00 am

I started a new topic for question 7: http://fmta.forumotion.com/t20-question-7b

**16** Re: Correction & Exam Answers on Wed Aug 03, 2011 6:44 am

ok, thanks, i did the same calculation for answer number 9! so should be right! :-)

**17** Re: Correction & Exam Answers on Thu Aug 04, 2011 6:07 am

Company A

ErA 0.102

δ2A 0.09

Company B

ErB 0.1175

δ2B 0.250389063

I get a really high value for Standard Deviation.

ErA 0.102

δ2A 0.09

Company B

ErB 0.1175

δ2B 0.250389063

I get a really high value for Standard Deviation.

**18** Re: Correction & Exam Answers on Thu Aug 04, 2011 6:54 am

I get the same values for expected return, but my variance is different.

**19** Re: Correction & Exam Answers on Thu Aug 04, 2011 7:01 am

Expected Return for Company A

Very weak: 0.1 * -0.04 = -0.004

Weak: 0.2 * -0.01 = -0.002

Steady weak: 0.25 * 0 = 0

Steady strong: 0.2 * 0.01 = 0.002

Strong: 0.15 * 0.04 = 0.006

Very strong: 0.1 * 1 = 0.1

Sum: 0.102

Expected Return 10.2%

**Probability * Return**Very weak: 0.1 * -0.04 = -0.004

Weak: 0.2 * -0.01 = -0.002

Steady weak: 0.25 * 0 = 0

Steady strong: 0.2 * 0.01 = 0.002

Strong: 0.15 * 0.04 = 0.006

Very strong: 0.1 * 1 = 0.1

Sum: 0.102

Expected Return 10.2%

Last edited by Admin on Thu Aug 04, 2011 7:04 am; edited 2 times in total

**20** Re: Correction & Exam Answers on Thu Aug 04, 2011 7:03 am

Expected Return for Company B

Very weak: 0.1 * -0.02 = -0.002

Weak: 0.2 * -0.015 = -0.003

Steady weak: 0.25 * -0.01 = -0.0025

Steady strong: 0.2 * 0.1 = 0.02

Strong: 0.15 * 0.4 = 0.06

Very strong: 0.1 * 0.45 = 0.045

Sum: 0.1175

Expected Return 11.75%

**Probability * Return**Very weak: 0.1 * -0.02 = -0.002

Weak: 0.2 * -0.015 = -0.003

Steady weak: 0.25 * -0.01 = -0.0025

Steady strong: 0.2 * 0.1 = 0.02

Strong: 0.15 * 0.4 = 0.06

Very strong: 0.1 * 0.45 = 0.045

Sum: 0.1175

Expected Return 11.75%

Last edited by Admin on Thu Aug 04, 2011 7:22 am; edited 1 time in total

**21** Re: Correction & Exam Answers on Thu Aug 04, 2011 7:13 am

Variance for Company A

I have kept everything as a percentage so the numbers don't get too small:

(-4 - 10.2)^2 * 0.1 = 20.164

(-1 - 10.2)^2 * 0.2 = 25.088

(0 - 10.2)^2 * 0.25 = 26.01

(1 - 10.2)^2 * 0.2 = 16.928

(4 - 10.2)^2 * 0.15 = 5.766

(100 - 10.2)^2 * 0.1 = 806.40400

Total: 20.164 + 25.088 + 26.01 + 16.928 + 5.766 + 806.40400

Total = 900.36

Variance = 900.36

Standard Deviation = sqrt(900.36)

Standard Deviation = 30.0059994%

I have kept everything as a percentage so the numbers don't get too small:

**(Return - Expected Return)^2 * Probability**(-4 - 10.2)^2 * 0.1 = 20.164

(-1 - 10.2)^2 * 0.2 = 25.088

(0 - 10.2)^2 * 0.25 = 26.01

(1 - 10.2)^2 * 0.2 = 16.928

(4 - 10.2)^2 * 0.15 = 5.766

(100 - 10.2)^2 * 0.1 = 806.40400

Total: 20.164 + 25.088 + 26.01 + 16.928 + 5.766 + 806.40400

Total = 900.36

Variance = 900.36

Standard Deviation = sqrt(900.36)

Standard Deviation = 30.0059994%

Last edited by Admin on Thu Aug 04, 2011 7:35 am; edited 4 times in total

**22** Re: Correction & Exam Answers on Thu Aug 04, 2011 7:21 am

Variance for Company B

I have kept everything as a percentage so the numbers don't get too small:

(-2 - 11.75)^2 * 0.1 = 18.90625

(-1.5 - 11.75)^2 * 0.2 = 35.1125

(-1 - 11.75)^2 * 0.25 = 40.640625

(10 - 11.75)^2 * 0.2 = 0.6125

(40 - 11.75)^2 * 0.15 = 119.709375

(45 - 11.75)^2 * 0.1 = 110.55625

Total: 18.90625 + 35.1125 + 40.640625 + 0.6125 + 119.709375 + 110.55625

Total = 325.5375

Variance = 325.5375

Standard Deviation = sqrt(325.5375)

Standard Deviation = 18.0426578%

I have kept everything as a percentage so the numbers don't get too small:

**(Return - Expected Return)^2 * Probability**(-2 - 11.75)^2 * 0.1 = 18.90625

(-1.5 - 11.75)^2 * 0.2 = 35.1125

(-1 - 11.75)^2 * 0.25 = 40.640625

(10 - 11.75)^2 * 0.2 = 0.6125

(40 - 11.75)^2 * 0.15 = 119.709375

(45 - 11.75)^2 * 0.1 = 110.55625

Total: 18.90625 + 35.1125 + 40.640625 + 0.6125 + 119.709375 + 110.55625

Total = 325.5375

Variance = 325.5375

Standard Deviation = sqrt(325.5375)

Standard Deviation = 18.0426578%

Last edited by Admin on Thu Aug 04, 2011 7:33 am; edited 2 times in total

**23** Re: Correction & Exam Answers on Thu Aug 04, 2011 7:30 am

Have I done anything wrong here? I think we can agree on the answer for Expected Return for Company A and Company B.

How did you get your value for Variance?

How did you get your value for Variance?

**24** Re: Correction & Exam Answers on Thu Aug 04, 2011 8:35 am

**This is just Covariance stuff, so best to ignore this until we can agree on our Variance numbe**

**rs!**

Difference for Company A

(-4 - 10.2) = (-14.2)

(-1 - 10.2) = (-11.2)

(0 - 10.2) = (-10.2)

(1 - 10.2) = (-9.2)

(4 - 10.2) = (-6.2)

(100 - 10.2) = (89.8)

Difference for Company B

(-2) - 11.75 = -13.75

(-1.5) - 11.75 = -13.25

(-1) - 11.75 = -12.75

10 - 11.75 = -1.75

40 - 11.75 = 28.25

45 - 11.75 = 33.25

Product of differences:

(-14.2)*(-13.75) = 195.25

(-11.2)*(-13.25) = 148.4

(-10.2)*(-12.75) = 130.05

(-9.2)*(-1.75) = 16.1

(-6.2)*(28.25) = -175.15

(89.8)*(33.25) = 2985.85

Product*Probability

195.25*0.1 = 19.52500

148.4*0.2 = 29.68

130.05*0.25 = 32.5125

16.1*0.2 = 3.22

-175.15*0.15 = -26.2725

2985.85*0.1= 298.58500

Covariance

19.52500+29.68+32.5125+3.22+(-26.2725)+298.58500 = 357.25

Covariance=357.25

Correlation = 357.25/ (18.0426578 * 30.0059994) = 0.659877969

Last edited by Admin on Fri Aug 05, 2011 5:00 am; edited 3 times in total

**25** Re: Correction & Exam Answers on Fri Aug 05, 2011 2:29 am

My last results for Variance and Standard deviation.

Company A

ErA 0.102

δ2A 0.09

δA 30%

Company B

ErB 0.1175

δ2B 0.0326

δB 18%

I did it with the real number, didnt use percentages.

But we have the same values now. I think it's finally correct.

I'll work the covariance and correlation now,i'll post later my results.

Cheers

Company A

ErA 0.102

δ2A 0.09

δA 30%

Company B

ErB 0.1175

δ2B 0.0326

δB 18%

I did it with the real number, didnt use percentages.

But we have the same values now. I think it's finally correct.

I'll work the covariance and correlation now,i'll post later my results.

Cheers

Go to page : **1**, 2

Similar topics

**Permissions in this forum:**

You **cannot** reply to topics in this forum