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　　10. Continued
　　(b) Determine the impact of an immediate 10% depreciation in the U.S. dollar on
　　(i) the consolidated surplus of CanCo and TargetCo in Canadian dollars, and
　　(ii) the net cash flow of TargetCo itself.
　　(c) Describe the external concerns associated with the purchase that may affect
　　current and potential CanCo shareholders.
　　(d) Outline how options and other financial instruments could be used to manage the
　　foreign exchange exposure of TargetCo’s net cash flow position and compare
　　TargetCo’s risk exposure under each approach.
　　(e) Calculate the cost of a European style currency option that would protect
　　TargetCo’s net cash flow position in U.S. dollars for one year. Assume that the
　　currency value follows a geometric Brownian motion process and all cash flows
　　are end-of-year.
　　COURSE 8: Fall 2003 - 9 - GO ON TO NEXT PAGE
　　Investment
　　Afternoon Session
 
　　11. (6 points) You are given the following information.
　　Current index value = 800
　　Annual volatility of index = 20%
　　No dividends
　　Price of 1 month at-the-money European call index option = 25.025
　　One-month time steps for all calculations
　　Risk-free rate is the same for all periods
　　(a) Calculate the risk-free rate implied in the call price using a binomial tree.
　　(b) Estimate an upper and lower bound on the price of a 2-month American lookback
　　call.
　　(c) Calculate the price of a 2-month American lookback call using a binomial tree.
 
　　12. (3 points) ABC Life has formulated an ALM strategy whereby the long-term liability
　　cash flows of its non-participating life block are backed with equities. ABC Life does not
　　feel that duration is an appropriate metric to measure the interest rate sensitivity of this
　　asset class. Stochastic modeling techniques are used to measure the likelihood that the
　　equities will be sufficient to meet the long-term cash flows beyond 20 years.
　　Critique the use of duration for equities in the ALM strategy for ABC Life.
　　**END OF EXAMINATION**
　　MORNING SESSION
　　COURSE 8: Fall 2003 - 10 - GO ON TO NEXT PAGE
　　Investment
　　Afternoon Session
　　**BEGINNING OF EXAMINATION**
　　AFTERNOON SESSION
 
　　13. (3 points) Describe the key features of derivatives risk management aimed at preventing
　　derivatives mishaps in an insurance company setting.
 
　　14. (4 points) ABC Life is investigating hedging the currency exposure of its international
　　operations.
　　(a) Describe the critical factors for identifying the optimal degree of currency
　　exposure to be hedged.
　　(b) For each of the critical factors indicate whether the optimal hedge ratio of the
　　currency exposure increases or decreases as the factor increases.
　　(c) Explain the two economic theories relating to exchange rates.
　　(d) Assess the impact on the hedging strategy for the currency risk assuming the
　　economic theories are:
　　(i) True
　　(ii) False
　　COURSE 8: Fall 2003 - 11 - GO ON TO NEXT PAGE
　　Investment
　　Afternoon Session
 
　　15. (4 points) Given the following information.
　　POOL A POOL B
　　Originator GNMA FNMA
　　50% 30-Type 30-year fixed year fixed
　　50% balloon
　　Weighted Average Coupon 8.0% 9.0%
　　Weighted Average Maturity 25.6 years 19.2 years
　　27 years 80% 25 years 20%
　　22 years 20%
　　19 years 20%
　　16 years 20%
　　Maturity Distribution
　　20 years 20%
　　14 years 20%
　　% Refinance Mortgagors 20% 80%
　　% Home Purchase Mortgagors 80% 20%
　　Economic Environment: Strong housing market
　　Current Yield Curve
　　1.5%
　　3.5%
　　1-year Treasury
　　10-year Treasury
　　30-year Treasury 5.5%
　　Rates for New Issues of 30-Year Fixed Mortgages for Calendar Year 2003 through
　　November
　　8.6% July 7.5%
　　8.4% August 7.0%
　　8.2% September 6.5%
　　8.0% October 6.0%
　　7.9% November 6.5%
　　January
　　February
　　March
　　April
　　May
　　June 7.6%
　　(a) Describe the four primary structural components of the Goldman Sachs mortgage
　　backed securities prepayment model including
　　(i) primary variables that drive change in these components, and
　　(ii) expected impact of these variables on total prepayments.
　　(b) Compare and contrast the impact on prepayments in the two mortgage pools for
　　each of the variables described in (a).
　　COURSE 8: Fall 2003 - 12 - GO ON TO NEXT PAGE
　　Investment
　　Afternoon Session
　　做决定之前仔细考虑，一旦作了决定就要勇往直前、坚持到底。——高顿网校金玉良言

 

 
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