Handout Test Exam 1 w answers Handwritten is

Hand-out Test Exam #1 w/ answers. Hand-written is what you get – for several reasons. Test Exam #2 (pink. ) How do we play this? Cheat Sheet (yellow. ) But for God’s sake don’t take the name literally. No course plan or slides. 1 December 2, 2010 MATH 2510: Fin. Math. 2

Today: Swaps & Test Exam #1 Hull’s Chapter 7 on swaps in just two slides. There won’t be exam questions on swaps. Remaining parts of Test Exam #1 l Question E. (When you’re asked to “comment on” something, that something is usually wrong. ) l Question D. One formula you must learn by heart. You can get a lot of mileage out of it. 2 December 2, 2010 MATH 2510: Fin. Math. 2

Hull’s Chapter 7: Swap contracts An agreement to exchange (”swap”) one series of payments for another – from simple to very complex. A forward is – by that definition – a swap. The ”plain vanilla” interest rate swap tranforms fixed interest payments into variable interest payments. (”Fixed for floating. ”) Common. Swaps are frequently used across exchange rates. 3 December 2, 2010 MATH 2510: Fin. Math. 2

W’s of Swaps What, I? Previous slide. How? A plain vanilla interest rate swap can be valued without a dynamic model. Surprising. Why? A comparative advantage argument. And its perils. What, II? Complex swaps. (Procter & Gamble swap, credit default swaps, …) 4 December 2, 2010 MATH 2510: Fin. Math. 2

Exam Advice l l 5 Be brief, be quick. It’s not a beauty contest – I can read my own hand-writing, I can sure as h*¤# read yours. Questions are independent, so if you get stuck, go on. Partial credit is given (a lot. ) Give it the old college try. December 2, 2010 MATH 2510: Fin. Math. 2