FRM part II-market Drifts

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FRM part II-market Drifts

Postby anbu.edu » Tue Mar 04, 2014 6:05 pm

303.1. Analyst Barry runs an short-term interest rate simulation using Tuckman's simple Model 1, which assumes no drift (zero drift) and is given by:
The time step in his model is one month; i.e., dt = 1/12. His Model 1 also makes two assumptions. First, the initial or current (t0) short-term rate is equal to 4.00%. Second, the annual basis-point volatility is 200 basis points. In the first step of his first trial, the random uniform variable is 0.8925 such that, via inverse transformation, the associated random standard normal value is 1.240; i.e., =NORM.S.INV(89.25%) = 1.240. If r(0) is 4.00%, to what level does the rate evolve in the first month, r(1/12)?

a. 3.854%
b. 4.716%
c. 5.393%
d. 6.480%

In this question what "In the first step of his first trial, the random uniform variable is 0.8925 such that, via inverse transformation, the associated random standard normal value is 1.240; i.e., =NORM.S.INV(89.25%) = 1.240." refers too

and how to answer the question

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shreyas
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FRM part II-market Drifts

Postby shreyas » Fri Mar 07, 2014 11:56 am

In Tuckman's models, the stochastic term can be arrived using Monte Carlo Simulation.In this case the random variable generator gives a value of 1.24 which has been inverse transformed to arrive at a standard normal random variable value of 0.8925 which will be put in the equation for the stochastic term


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