A few questions

[Anonymous]

I have my exam in 2 days. A few doubts if anybody is willing to clarify

The material available online for Ho-Lee, Hull White and Black-Derman toy models is hardly explanatory? Can someone tell me the main differences between them?

The ways of determining the utility function? Are they referring to for e.g. using your own wealth as a benchmark?

Any help with the following LOS’s would definitely help:

Calculate the value of non-callable bonds using term structure models
Describe the impact of an embedded call on the value of a bond using term
structure models
Calculate effective duration and convexity within a term structure model
Discuss the implications of choosing one term structure model
over the others

Thank you for your help!

[Ashwin Goyal]

A few questions

[Anonymous]

Are you sure you are studying for the PRM exam? None of these models you refer to are in the PRMIA handbook. I am unsure if I can help. Maybe another member can.

Mukul Pareek

[Anonymous]

The portion (or study guides) got updated like 2 days ago. So, I assume tests from now will be based on that

[Anonymous]

Thanks for the information. I am not sure how deep we should go into these, but I have added a really brief tutorial on the subject here: http://www.riskprep.com/all-tutorials/35-exam-1/130-modeling-interest-rate-changes. In the coming days, I will add a few questions as well, with the caveat that these are unlikely to be tested in the exam as they aren’t in the handbook.

Mukul

[Anonymous]

Here’s a Summary of the models and their characteristics:
Ho-Lee:
[ul][/ul]Normal Distribution of short rates
[ul][/ul]Constant Vol
[ul][/ul]No Mean Reversion
[ul][/ul]Can use binomial tree
Hull-White:
[ul][/ul]Normal Distribution of short rates
[ul][/ul]Constant Vol
[ul][/ul]Has Mean Reversion
[ul][/ul]Cannot use binomial tree
BDT:
[ul][/ul]LogNormal Distribution of short rates
[ul][/ul]Vol Structure
[ul][/ul]Has Mean Reversion
[ul][/ul]Can use binomial tree

[Author]

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