7732%EXPLANATION2X0.10VALUE REPRESENTED BY 'C' = 9.2625 X E = 11.313...

8.7732%

Explanation

2x0.10

Value represented by 'C' = 9.2625 x e

= 11.3132%

Question #21 of 38

Question ID: 472693

Increasing the number of paths generated in a Monte Carlo simulation is most likely to increase the:

ᅞ

A)

utility of the model.

ᅞ

B)

fundamental accuracy of the estimated value.

ᅚ

C)

statistical accuracy of the estimated value.

Increasing the number of paths would increase the statistical accuracy of the estimate but does nothing for the fundamental

accuracy of the estimated value which depends on the quality of model inputs. Model utility depends on valuation accuracy of

the model and hence would not increase as we increase the number of paths.

Question #22 of 38

Question ID: 472604

Sam Roit, CFA, has collected the following information on the par rate curve, spot rates, and forward rates to generate a

binomial interest rate tree consistent with this data.

Maturity

Par Rate

Spot Rate

1

5%

5.000%

2

6%

6.030%

3

7%

7.097%

The binomial tree generated is shown below (one year forward rates) assuming a volatility level of 10%:

0

1

2

5%

7.7099%

C

A

9.2625%

B

Riot also generated another tree using the same spot rates but this time assuming a volatility level of 20% as shown below:

5%

8.9480%

13.8180%