Information about the Final Exam
I have just finished writing the final exam for Finance 4366. The test consists of the following sections:
Section 1 (70 points). This section consists of Problem #1.1 and Problem #1.2. Each problem is worth 35 points.
- Problem #1.1 addresses concepts such as the theory of risk aversion, risk measurement, insurance pricing, demand for insurance, the certainty equivalent of wealth, the risk premium, etc. (basically stuff we covered prior to the first midterm).
- Problem #1.2 requires mapping out asset price and call option price binomial trees involving 3 timesteps. The whole point is to determine the current fair market value for a call option. The problem also addresses the whole issue of "dynamic hedging" in the binomial framework. You would do well to review rather closely Introduction to Binomial Trees (Part 1) and Introduction to Binomial Trees (Part 2). Also the problem set that was assigned for chapter 10 (see Problem Set 6 Solutions).
Section 2 (30 points). This section consists of Problem #2.1 and Problem #2.2. Each problem is worth 15 points.
- Problem #2.1 involves computing the delta, rho, theta and vega of a call option and interpreting your results. You'll want to review my options paper (comparative statics) for this one.
- Problem #2.2 involves setting up a specific option spread strategy, determining the payoffs from such a strategy, and determining a fair price for the spread. You'll want to review chapter 9 of the textbook and the related problem set (see Problem Set 5 Solutions).
Finally, I have also posted a new version of the Formula Sheet for Final Exam which more accurately reflects the exam content than what was previously (i.e., prior to Wednesday, 12/8/04 at 7:15 p.m. Central Time) available from this link.
One final and very important point - the exam will be given from 2-4 p.m. on Friday in HCB 408. I will not give any makeups.
Posted by Jim Garven at December 8, 2004 07:18 PM