Actuarial Financial Math Exam (correct answers)
Annual Effective Interest Rate correct answers (1+r)ⁿ
Really, to the nT because it'll be how many times it's compounded in a year x how much
of a year it was
Continuously Compounded Interest correct answers e∧rnT
Arbitrary correct answers Based on random choice or personal whim
Arbitrage correct answers A transaction where one simultaneously buys and sells
related assets with no net investment of funds or risk to generate a positive cash flow
today or in the future
Random correct answers Chosen without method (without bias)
Non-random correct answers Chosen with method (bias)
Deterministic correct answers Inevitable consequence
Non-deterministic correct answers Unpredictable situation
Standing assumptions correct answers 1) NO ARBITRAGE!
2) Shares of stock and monetary amounts can be subdivided into arbitrary amounts for
sale and purchase.
3) There is one prevailing interest rate, the same for everyone and the same for both
lending and borrowing.
4) Everyone has an infinite line of credit.
Conventions? correct answers Unless explicitly stated otherwise:
1) Stocks do not pay dividends.
2) The purchase price for any asset is the same as the selling price, i.e., there is no bid-
ask spread.
3) There are no transaction costs.
4) Options are European.
What is a derivative? correct answers An agreement between 2 people that has a value
determined by the price of something else
Kind of like the bet on the price of something
Serves as hedging
Uses for Derivatives correct answers 1) Risk management
2) Speculation
3) Reduced transaction costs
4) Regulatory arbitrage
, What is Hedging? correct answers A risk management strategy used in limiting or
offsetting probability of loss from fluctuations in the prices of commodities
What are Catastrophe Bonds? correct answers Risk-linked securities that transfer a
specified set of risks from a sponsor to investors
An insurance company issues bonds through an investment bank, which are then sold
to investors. These bonds are inherently risky. If no catastrophe occurred, the insurance
company would pay a coupon to the investors, who made a healthy return. On the
contrary, if a catastrophe did occur, then the principal would be forgiven and the
insurance company would use this money to pay their claim-holders
If there's an earthquake, the issuer doesn't need to repay the bonds. If there's no
earthquake, bondholders get greater interest payments beacuse it's so risky.
What is offer price / ask price? correct answers The price at which you BUY the stock or
asset
What're they asking? I'll make you an offer.
What is bid price? correct answers The price at which you sell the stock or asset
What's your bid?
What is bid-ask spread? correct answers The difference between the price at which you
buy and the price at which you sell
Buy stock correct answers You PAY:
(Ask or offer price x number of shares) + commission
Sell stock correct answers You RECIEVE:
(Bid price x number of shares) - commission
Long position correct answers When you buy
Short position correct answers When you sell
Short sale / short selling correct answers When you borrow stock and then sell it at a
high price. Then later, you buy the stock back (hopefully at a lower price) and return it.
So when you expect the price of the stock to fall
Reasons for short sale correct answers 1) Speculation to make return
2) Way to borrow money
3) Hedging to offset risk of owning the stock
What is the lease rate? correct answers The payment required by the lender of the
asset. Their compensation
What is an outright purchase of an asset? correct answers Using your own money to
purchase an asset rather than borrowing it
Annual Effective Interest Rate correct answers (1+r)ⁿ
Really, to the nT because it'll be how many times it's compounded in a year x how much
of a year it was
Continuously Compounded Interest correct answers e∧rnT
Arbitrary correct answers Based on random choice or personal whim
Arbitrage correct answers A transaction where one simultaneously buys and sells
related assets with no net investment of funds or risk to generate a positive cash flow
today or in the future
Random correct answers Chosen without method (without bias)
Non-random correct answers Chosen with method (bias)
Deterministic correct answers Inevitable consequence
Non-deterministic correct answers Unpredictable situation
Standing assumptions correct answers 1) NO ARBITRAGE!
2) Shares of stock and monetary amounts can be subdivided into arbitrary amounts for
sale and purchase.
3) There is one prevailing interest rate, the same for everyone and the same for both
lending and borrowing.
4) Everyone has an infinite line of credit.
Conventions? correct answers Unless explicitly stated otherwise:
1) Stocks do not pay dividends.
2) The purchase price for any asset is the same as the selling price, i.e., there is no bid-
ask spread.
3) There are no transaction costs.
4) Options are European.
What is a derivative? correct answers An agreement between 2 people that has a value
determined by the price of something else
Kind of like the bet on the price of something
Serves as hedging
Uses for Derivatives correct answers 1) Risk management
2) Speculation
3) Reduced transaction costs
4) Regulatory arbitrage
, What is Hedging? correct answers A risk management strategy used in limiting or
offsetting probability of loss from fluctuations in the prices of commodities
What are Catastrophe Bonds? correct answers Risk-linked securities that transfer a
specified set of risks from a sponsor to investors
An insurance company issues bonds through an investment bank, which are then sold
to investors. These bonds are inherently risky. If no catastrophe occurred, the insurance
company would pay a coupon to the investors, who made a healthy return. On the
contrary, if a catastrophe did occur, then the principal would be forgiven and the
insurance company would use this money to pay their claim-holders
If there's an earthquake, the issuer doesn't need to repay the bonds. If there's no
earthquake, bondholders get greater interest payments beacuse it's so risky.
What is offer price / ask price? correct answers The price at which you BUY the stock or
asset
What're they asking? I'll make you an offer.
What is bid price? correct answers The price at which you sell the stock or asset
What's your bid?
What is bid-ask spread? correct answers The difference between the price at which you
buy and the price at which you sell
Buy stock correct answers You PAY:
(Ask or offer price x number of shares) + commission
Sell stock correct answers You RECIEVE:
(Bid price x number of shares) - commission
Long position correct answers When you buy
Short position correct answers When you sell
Short sale / short selling correct answers When you borrow stock and then sell it at a
high price. Then later, you buy the stock back (hopefully at a lower price) and return it.
So when you expect the price of the stock to fall
Reasons for short sale correct answers 1) Speculation to make return
2) Way to borrow money
3) Hedging to offset risk of owning the stock
What is the lease rate? correct answers The payment required by the lender of the
asset. Their compensation
What is an outright purchase of an asset? correct answers Using your own money to
purchase an asset rather than borrowing it
