State the 4 assumptions required to construct a two-bond hedge (8 pts):
Model for prepayment is sound Assume good estimate for the up move and down move for the bonds used … …
Volatility assumptions of Montecarlo simulations are valid. Average price change is a good approximation for how prices will change
- Considered most scenarios of yield curve shifts in modeling - Reasonably accurate prepayment model has been used - Reasonably accurate model has been used to derive the price sensitivities given a SMALL yield change - Using the average price change methodology is statistically and empirically sound
lxwqh, was that off the top of your head? or did you look it up?
I read about this a couple days ago / not sure all correct