# question 47 CAIA sample exam

Hi All, Can someone tell me what the formula is for calculation question #47 and how to go about solving it ? need also help on q42,23 and 44. thanks in advance

1. 200 = (x(200*1.25) +(1-x)(200*.75))/1.01 202 = 250x + 150 - 150x , x =0.52 answer C 43) P = (0.58 * 0 + (1-0.58)*(180 - 150))/1.04 = 12.11 180/1.04 - 12.11 = 160.97 = answer B 44) 156 = ( 180 / 1 + r + s) We know r= 0.10 180/156 = 1.154 1.154 - 1.1 = 0.054 = answer C Can’t help with #47, that one has me stumped too.

sircon, thanks a lot for ur help but can u also help me with the equation/formulas for the above answers. i am looking through my books but it did not make sense kindly assist

Are you using CAIA textbooks or Schweser?

schweser

For 42) Assets (Stated as 200) = (1/1+risk free rate)(X(Assets (1+%) +(1-X)(Assets(1-%)) Where % was given as 25% and risk free rate was given as 1% Simple plug and chug after that. For 43) You are given the probability 0.58 and the risk free rate 0.04 First you need to find the value of the put Put = (1/1+risk free rate)(0.58 *(upmove in assets which will be zero because we wouldn’t exercise the put) + (1-0.58)(Face value of debt - (Assets(1-%)) Face Value of debt is given as 180 and from Q42 we found that the downside value of Assets would be 200(1-.25) = 150 So Put = (1/1.04) ((0.58*0) +(1-.58)(180-150)) Put = 12.11 Now that you have the value of the put, you have to subtract that value for the price of the discounted debt So 180/1.04 - 12.11 = 160.97 or 161 For 44 Price of risky bond = Face value of debt / (1 + risk free rate + credit spread) We are given price of risk bond 156 We know the face value of debt 180 And are given the risk free rate 10% 156 = 180/( 1+0.10 + credit spread) 180/156 = 1.154 Subtract 1+0.1 from 1.154 to arrive at the credit spread 1.154 - 1.1 = 0.054 All of these formulas can be found in Topic 7 “Credit Derivatives”

Ok so in Book 2 Page 16 can give you the formula to Question 41 Page 22 can give you the formulas for Q’s 42,43,44 Good luck with it.

book 2 is the current and integrated practices book and page 16 is the exp loss calculation. are u referring to the bsm model? in chapter 1 of credit dervatives

Yes book 2 is Current and Integrated Topics. Q 41 42 43 44 all come from credit derivatives. Q41 is Calculating expected credit loss and that formula can be found on page 16 in the example shaded in blue Q 42 43 44 can be found on page 22 and all the formulas for those questions can be found in the shaded blue example on that page.

re: q 47. 100*10=1,000 1,000*0.05=50 11*10=110 50-110=-60 (default) LGD=1-(RR+width) = 1-(0.45+0.02)= 0.53 answer=C

GL123, thanks for that.