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  MMF 2000: Assignment 2 Due: May 17, 2013 This assignment is to be done in groups of four as shown below. All relevant code should be included in an appendix. All answers should be presented in a clear and organized format. Use graphs and tables where necessary. Group 1: Wanshu Zhu Adam Piesowicz Yuning Chen Gideon Berger Group 2: Jiayi Liu Philip Jang Meng Zhang Pinar Colak Group 3: Albion Yang Prem Manghanmal Chattani Yifei Li Matthew Dempsey Group 4: Yiming Chen Yuting Yang Maria Isabel Perez Camacho David Jared Vizsolyi Group 5: Rui Zhang Max Yan Joshua Weiss Andrew David McMullen Group 6: Zhao Li Amin Alamdar Yazdi Xiaoyu Sun Elmer Nkonyeasua Atagu  Group 7: Ke Chen Carlos Eduardo Martinez Amaya Zhilei Sun Fei Jia Group 8: Christina Free Carlos Alejandro Nunez Trujillo Robert Gibson  Navid Javadi Question 1: With the following portfolio of bonds (semi-annual coupon payments): Bonds Notional ($) Coupon Maturity (years) Rating American Express Inc 10,000,000.00 5.00% 10 AAA Boeing 50,000,000.00 6.00% 5.5 BB Campbell Soup Co 100,000,000.00 4.50% 3 BBB Dell Inc 30,000,000.00 5.00% 2 CC Ebay Inc 20,000,000.00 5.25% 15 CCC Ford Motor Co 60,000,000.00 8.00% 22.5 AAA Fedex Corp 80,000,000.00 3.50% 7 A General Motors 100,000,000.00 6.00% 5 AA IBM 45,000,000.00 5.50% 6 A Novell Inc 90,000,000.00 5.00% 11 A use the CreditMetrics approach to show the effect of using correlated normal and t 10 -distributed random variables on the 1-year 99% VaR and 0.5-year 99% VaR. The following is the 1-year transition matrix: Global Average One-Year Transition Rates (%) From/To AAA AA A BBB BB B CCC/C D  AAA 91.67 7.69 0.48 0.09 0.06 0.00 0.00 0.00  AA 0.62 90.49 8.10 0.60 0.05 0.11 0.02 0.01  A 0.05 2.16 91.34 5.77 0.44 0.17 0.03 0.04 BBB 0.02 0.22 4.07 89.71 4.68 0.80 0.20 0.29 BB 0.04 0.08 0.36 5.78 83.37 8.05 1.03 1.28 B 0.00 0.07 0.22 0.32 5.84 82.52 4.78 6.24 CCC/C 0.09 0.00 0.36 0.45 1.52 11.17 54.07 32.35 Source: Standard & Poor’s Global Fixed Income Research.   Use the most recent rates from: http://www.bankofcanada.ca/en/rates/yield_curve.html    as the risk free rates for the yield curve. Construct your curve using as many points as you feel necessary (using all the points is incorrect). Use equity correlations as a proxy for your asset correlations. (Note that the ratings are not indicative of current market ratings of the companies.) Assume the recovery rate is 50% (fixed). The following table gives the spreads (in basis points) for the different ratings (for extrapolations, hold the boundary rate constant): Term Structure 6m 1y 3y 5y 10y    R  a   t   i  n  g AAA 5.79 7.11 11.69 15.32 21.43 AA 6.93 8.19 13.49 18.34 26.49 A 14.12 17.19 27.2 34.36 44.61 BBB 30.11 34.28 47.97 57.88 72.28 BB 114.42 123.84 153.32 172.99 198.09 B 238.37 269.49 342.18 371.37 388.96 CCC/C 654.18 654.18 654.18 654.18 654.18 In the table above, the 1y BBB spread 34.28 bp. What correlation correspond to this spread, given the transition matrix from the previous page, Sharpe ratio of 0.5 and the recovery rate of 50%?    Question 2: Obtain the Bank of Canada zero rates from: http://www.bankofcanada.ca/en/rates/yield_curve.html Assume today is Feb 26, 2010, and you enter into a 12-year $10,000,000 pay-fixed swap,  payments, compounding and reset are semi-annual. a) Find the swap rate.  b) Calculate the 95% potential exposure of the swap. This must be obtained by using the Vasicek model to simulate the first principal component of the yield curve. Note that this involves first calibrating the Vasicek model on either historical or implied data. Explain your calibration decision.

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Jul 23, 2017

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Jul 23, 2017
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