- This topic has 3 replies, 2 voices, and was last updated 11 years ago by
.
- Posts
Hello sir.. i have a question from the december 2009 paper , its question 5 , part (b) and (c).. i dont seem to understand how theyve calculated the six monthly interest rate and what does the term ” vanilla swap ” mean ? and from part (c) howd did they calculate the six monthly value at risk on interest rate exposure ?
sorry for the trouble.. =(To get the six month rate, they have used the fact that (1 + r )^2 = 1 + R
(where r is the six monthly rate and R is the yearly rate. The reason 1+ r is squared is because there are two six month periods in a year)A vanilla swap is where two companies borrow the same amount, one pays fixed interest and one pays floating interest, and they pay each others interest i.e. and ordinary interest rate swap.
To get the value at risk, they use the normal distribution tables in the usual way. However since we are given the standard deviation per year, we need the six month standard deviation. To get this you use the fact that the standard deviation is the square root of the variance. So…..the six month variance = the yearly variance / 2
If you take the square root of both sides, then the six month std devn = the yearly std dvn / (sqr root 2)Do appreciate that this question was set by the previous examiner – most of his questions were too difficult and would not be asked by the current examiner.
- You must be logged in to reply to this topic.