in P 278. Q10, D. to calculate weekly VaR from monthly VaR, for standard deviation, can we use monthly deviation divide by SQRT(4), say.2? P280. Q15.C, can we say european option buyer has no current credit risk but has ending credit risk, American option buyer has current credit risk? P168. Q5, why the answer metion that year 2 net swap payment is S1-20.9519, it should be S2-20.9519, because each year floating is different, right? P119 Q12.A, how downside deviation is calulated for index? why future roll return needed to substract spot return, we roll the future, not spot, right?

francisgy Wrote: ------------------------------------------------------- > in P 278. Q10, D. to calculate weekly VaR from > monthly VaR, for standard deviation, can we use > monthly deviation divide by SQRT(4), say.2? > You can, but it is not as precise as doing sqrt (12/52). > P280. Q15.C, can we say european option buyer has > no current credit risk but has ending credit risk, > American option buyer has current credit risk? > You’ll find the concept of credit risk is very confusing. In short, there are two types of credit risk: 1. Current credit risk: amounts due at present time not be paid, i.e., any payment due (from counterparty), not market value. 2. Potential credit risk: Market value at a given time reflect potential credit risk, i.e., the value of the contract if the counterparty defaults now. For European option, no money is due, so no current credit risk. For American option, money CAN be due if you choose to settle now AND the option is in the money --> CAN have current credit risk. Both have potential credit risk which is equal the market value of the option. > P168. Q5, why the answer metion that year 2 net > swap payment is S1-20.9519, it should be > S2-20.9519, because each year floating is > different, right? > Can not find your question (don’t have 2011 books), but a common mix up in SWAP calculation is that SWAP settlement is just regular swapping of interest to be paid AT THE END of the period (which by convention is the beginning of the next period). So to calculate what interest you need to pay, you need the rate at the BEGINNING of LASt period since you are now at the end of last period. I assume here you are at the beginning of year 2 and need to settle the interest of LAST period, thus need to use S1. > P119 Q12.A, how downside deviation is calulated > for index? > Could not find your question, but the calculation should be just the same way you use for any time series return. > why future roll return needed to substract spot > return, we roll the future, not spot, right? Excess return, i.e., you get from investing futures without collateral = spot + roll return. Roll return measures the change of the GAP between future and spot price, i.e. change in Futures - spot price. It isolates thus the effect of backwardation/contango as the futures contract approaching maturity.