Questions from Business Statistics

Q: Does put–call parity hold when there is default risk?

Does put–call parity hold when there is default risk? Explain your answer.

Q: Suppose that in an asset swap B is the market price of

Suppose that in an asset swap B is the market price of the bond per dollar of principal,
is the default-free value of the bond per dollar of principal, and V is the present value of the asset swap s...

Q: Show that the value of a coupon-bearing corporate bond is

Show that the value of a coupon-bearing corporate bond is the sum of the values of its constituent zero-coupon bonds when the amount claimed in the event of default is the no-default value of the bond...

Q: A 4-year corporate bond provides a coupon of 4%

A 4-year corporate bond provides a coupon of 4% per year payable semiannually and has a yield of 5% expressed with continuous compounding. The risk-free yield curve is flat at 3% with continuous compo...

Q: Give an example of (a) right-way risk

Give an example of (a) right-way risk and (b) wrong-way risk.

Q: In an annual-pay cap, the Black volatilities for at

In an annual-pay cap, the Black volatilities for at-the-money caplets which start in 1, 2, 3, and 5 years and end 1 year later are 18%, 20%, 22%, and 20%, respectively. Estimate the volatility of a 1-...

Q: A company has issued 3- and 5-year bonds with

A company has issued 3- and 5-year bonds with a coupon of 4% per annum payable annually. The yields on the bonds (expressed with continuous compounding) are 4.5% and 4.75%, respectively. Risk-free rat...

Q: ‘‘A long forward contract subject to credit risk is a combination

‘‘A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.’’ Explain this statement.

Q: Verify (a) that the numbers in the second column

Verify (a) that the numbers in the second column of Table 24.3 are consistent with the numbers in Table 24.1 and (b) that the numbers in the fourth column of Table 24.4 are consistent with the numbe...

Q: Explain the difference between the Gaussian copula model for the time to

Explain the difference between the Gaussian copula model for the time to default and CreditMetrics as far as the following are concerned: (a) the definition of a credit loss and (b) the way in which...