Advanced Financial Analysis and Models

What is the purpose of interest rate assumptions in financial analysis?

• To determine the stock market trends.

• To set government monetary policy.

• To calculate tax liabilities.

• To estimate costs, returns, and assess financial performance.

Define duration in the context of bond pricing.

• Duration is the face value of a bond at maturity.

• Duration is the time until a bond matures.

• Duration is the total interest paid over the life of a bond.

• Duration is a measure of the sensitivity of a bond's price to changes in interest rates.

What is immunization in financial management?

• A process for reducing tax liabilities

• A method to increase asset liquidity

• Immunization is a strategy to match the duration of assets and liabilities to manage interest rate risk.

• A technique for maximizing short-term profits

How do matching assets and liabilities contribute to financial stability?

• It creates more investment opportunities without risk.

• Matching assets and liabilities increases debt levels.

• It leads to higher interest rates on loans.

• Matching assets and liabilities contributes to financial stability by ensuring liquidity and reducing risk.

Explain the difference between independent and dependent rates of interest.

• Independent rates are market-driven; dependent rates are influenced by central bank policies.

• Independent rates are fixed by the government; dependent rates fluctuate with inflation.

• Independent rates are based on historical data; dependent rates are determined by consumer demand.

• Independent rates are always lower than dependent rates; dependent rates are always higher.

What is the capital asset pricing model (CAPM)?

• A method for calculating tax liabilities.

• A strategy for managing a company's workforce.

• A framework for assessing employee performance.

• The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between expected return and risk of an asset.

Describe the option pricing model and its significance.

• The option pricing model is only used for stocks and not for other assets.

• The model is primarily focused on predicting future stock prices rather than option values.

• It is a method to calculate dividends rather than option pricing.

• The option pricing model, such as the Black-Scholes model, is significant for providing a systematic method to value options, aiding in informed trading and risk management.

What is the single period binomial lattice model used for?

• To price options in a single time period using a binomial model.

• To analyze market trends using complex algorithms.

• To determine the historical price of a stock.

• To calculate the volatility of an asset over multiple periods.

How does the multi-period option pricing model (CRR model) work?

• The CRR model works by constructing a binomial tree to represent possible price movements of the underlying asset and calculating option values through backward induction.

• The CRR model calculates option prices using a linear regression approach.

• The CRR model uses a single price point to determine option values.

• The CRR model relies on historical volatility to predict future prices.

What is a sigma field in probability theory?

• A sigma field is a single set that contains only the empty set.

• A sigma field is a random variable that can take any value.

• A sigma field is a collection of sets that is closed under complementation and countable unions, containing the sample space.

• A sigma field is a collection of finite sets only.