Kabhi, I did not know it is not working. Will ask vijay and revert with an answer.
SK, Tumhara Exam paper ka answer sheet hai yeh. Par economics mera subject kabhi nahi thaa, so yeh paper copy kiya hua hai😛
1. What is a Bell Shaped Yield Curve?
Unusual situation where medium-term rates are higher than rates on short-term and long-term instruments.
2. Why is it Bell Shaped?
The shape of the curve looks like a bell because the medium rates are in the centre while short and long ones on the sides.
3. What does a Bell Shaped Yield Curve Signify?
That the medium term rates are higher than rates on short term and long term instruments.
4. What does a typical Yield curve look like? Why?
The typical shape of the yield curve
The British pound yield curve as of 9th February 2005. This curve is unusual in that long-term rates are lower than short-term ones.
Yield curves are usually upward sloping asymptotically; the longer the maturity, the higher the yield, with diminishing marginal growth. There are two common explanations for this phenomenon. Firstly, it may be that the market is anticipating a rise in the risk-free rate. If investors would hold off investing, they anticipate receiving a better rate in the future. Therefore, under arbitrage pricing theory, investors who are willing to lock their money in now need to be compensated for the anticipated rise in rates—thus the higher interest rate on long-term investments.
However, it is not necessarily the case that interest rates are rising. Another explanation is that longer maturities entail greater risks for the investor (i.e. the lender). With longer maturities, more catastrophic events might occur that may impact the investment, hence the need for a risk premium. This explanation depends on the distant future being more uncertain than the near future, and risk of future adverse events (such as default and higher short-term interest rates) being higher than the chance of future positive events (such as lower short-term interest rates). This effect is also referred to as the liquidity spread. If the market expects more volatility in the future, even if interest rates are anticipated to decline, the increase in the risk premium can influence the spread and cause an increasing yield.
The opposite situation—short term interest rates higher than longer term rates—also can occur. For instance, at November 2004, the yield curve for UK Government bonds (i.e. the bonds which the UK Government issues to borrow money - see gilt) was partially inverted. The yield for the 10 year bond stood at 4.68% but only 4.45% on the thirty year bond. This is almost always due to the market's anticipation of falling interest rates. Although negative liquidity premiums can exist, specifically if long-term investors dominate the market, current financial philosophy is that positive liquidity premium dominates, so only the anticipation of falling interest rates will cause an inverted yield curve. Strongly inverted yield curves have historically preceded economic depressions.
The yield curve may also be flat or hump-shaped, due to anticipated interest rates being steady, or short-term volatility outweighing long-term volatility.
Yield curves move on a daily basis; representing the market's reaction to news. A further "stylized fact" observed is that yield curves tend to move in parallel. That is, an increase in the cost of borrowing money for one year is frequently accompanied by a similar shift at points further along the curve.
5. Why is the Canadian Dollar referred to as a reciprocal to the Japanese Yen?
Suppose one Canadian dollar can be exchanged for 82 Japanese yen - the exchange rate is 82 yen/dollar
e = 82 yen/dollar; 1 dollar =82 yen;
Can also be equivalently expressed as
number of dollars needed to purchase one unit of the foreign currency
1/82 dollar = 1 yen
One is just the reciprocal of the other, but the first one is often used.
6. If the Euro CD pays 3.7% and the USD pays 5.3%, why the differential in rates?
😕
7. Would it be prudent to invest in Euro or USD? Why??
USD as it gives better rate of return.
8. Why is March 07 Gold future more expensive to than the Dec 06 Gold future?
Because gold is clearly in a bullish stance.
9. What are second order derivatives? What potential risks do they carry??
In the foreign exchange market, second-order derivatives like vomma and vanna could make you pay dearly for your ignorance.
Vomma and vanna. They may sound like a couple of Greek game show tarts, but for the big interbank foreign exchange options players, they can represent millions of dollars. Who or what the hell are they?
Let's start with the definition of vega, which is the change in option value to a 1 percent move in volatility. Understanding the vega of an option is an important input to the design and maintenance of an effective hedge. As vega rises, so the hedging requirements increase, so ignoring it can leave a trader painfully underhedged and ultimately nursing substantial losses.
But understanding vega will only get you so far when it comes to running a book of foreign exchange exotics. Because of the vagaries of such instruments as reverse knockouts, you need to know more. For instance, how sensitive is the option's vega to changes in implied volatility? What, in other words, is its vomma?
And, for that matter, while you're at it, how sensitive is the option's vega to changes in the spot rate? What is its vanna?
Vomma and vanna are represented as DVega/dVol and DVega/dSpot respectively—an intimidatiang pair of terms—and inquiries about them are likely to receive little more than a quizzical look outside the exotic foreign exchange business. But there, they are critically important—and the consequences of ignorance are brutally clear. "If you don't incorporate them into your pricing functions, you'll enjoy extreme—but brief—popularity, sell lots of cheap exotic options, and then go spectacularly bust," says Rashid Hoosenally, managing director of the global risk strategy group at Deutsche Bank in London.
Vomma and vanna have been fairly common knowledge in vanilla markets for years, but they haven't been taken too seriously. In the case of vomma, the effect on vanilla options has been compensated for since the mid-1980s as a matter of course by hiking the volatility on out-of-the-money options compared with at-the-money (ATM) options (the smile curve). When exotics started booming, however, it quickly became clear that one couldn't fudge exotic volatility as one could in vanillas to allow for the effect of vomma. In a Black-Scholes-Merton vanilla framework, the market will simply mark the volatility on a 20-delta call at a higher volatility than its ATM equivalent, because that adds into the price the fact that it is convex to changes in volatility.
"You can't do that with exotics," says Howard Savery, senior vice president for business development at DerivaTech Consulting LLC. "For most exotics, there is no single volatility point on the smile curve, which, when put into a Black-Scholes-Merton model, will return a proper price that reflects the adjustment that should be made for DVega/dVol. In some cases, there is actually no single volatility point on or off the smile curve that results in the proper price." Under those circumstances, a "change the volatility by half a volatility point and—hey, we have the right price!" approach clearly doesn't work. Instead, it's a case of looking at the convexity curve itself and inferring some price parameters from it, or taking the route of a stochastic volatility model or some kind of Monte Carlo simulation.
As exotics took off, it also became clear that the effect of vomma and vanna in certain parts of the exotic world was far more dramatic than in vanilla products. In particular, it required a close examination of the real cost of hedging products such as barriers. "Exotic trades have a different and sometimes higher exposure to these second-order Greeks than they have to traditional delta and gamma," says Tim Owens, managing director in charge of risk advisory at Chase London.
More generally, although traders were previously aware that the vega of options fluctuated over volatility and time, they began to recognize the need to pay attention to the cost of hedging those effects at the outset of a trade when making a price. "On the sell-side of the market, this is an essential component of the business that anybody managing a portfolio has to know about," says Craig Puffenberger, global head of foreign exchange options at Credit Suisse First Boston in New York. "In addition to estimating the cost of hedging the vega exposure over the life of an option, in the case of a barrier option you are also trying to figure out what the expected life of the option will be. That's an essential part of trying to estimate what the actual add-on effect might be to a simple model's output."
The knockout challenge
If there's a particular exotic option that causes market-makers sleepless night in terms of vomma and vanna (not to mention other Greeks), it's probably the reverse knockout. In the case of a call, the standard structure starts in the money, with the knockout barrier set above spot. If the market rallies and hits the barrier, the option ceases to exist—it's the combination of this discontinuous payoff function and an in-the-money termination that makes for such exciting times.
The worst aggravation occurs when spot approaches the barrier. Take the case of a 90 call with a reverse knockout at 110, sold when spot is at 100. Say prices rally and, with a week to expiration, the spot is at 109. According to the model, the knockout isn't worth much, because, although it's 19 units in the money, it has a good chance of knocking out. On the other hand, if it doesn't knock out, the payout is likely to be quite near maximum. The bottom line is that as spot rallies toward the barrier, the stakes increase.
A reverse knockout may have a delta of opposite sign to a vanilla option (more chance of it knocking out the nearer the barrier it gets), hence the decline in its value as the barrier approaches. The sensitivity of its vega to changes in volatility (vomma) is also far higher than for a comparable vanilla in-the-money call. This is because a 1 point rise in volatility increases the probability of the option being knocked out—resulting in the ultimate change in vega, a factor that obviously doesn't apply in a vanilla situation. For the same underlying reason, the sensitivity of vega to spot (vanna) is also substantially higher as spot nears the barrier.
This makes vega hedging an excruciating process. The instinctive reaction is to sell an option with a strike as close as possible to the spot level at which the reverse knockout's vega peaks. Unfortunately, while that may provide vega neutrality at that level, the protection is likely to prove temporary since any change in volatility or spot will immediately dislodge it. As a result, there are people who prefer to leave some of these trades without a vega hedge at all. "In some circumstances, I would prefer to leave a dangerous trade roughly unhedged, but in a controlled way, rather than accurately mishedged," says Nassim Taleb, president of Empirica Capital LLC, a Greenwich, Conn.-based derivatives hedge fund.
In the case of a reverse knockout, vomma only displays these inconvenient tendencies as the spot price heads north. In the opposite direction—at, say, a spot level of 90—the option displays characteristics similar to an ATM vanilla option. A double no-touch (or range trade), by contrast, has discontinuity on both sides of the spot lattice, so it has a higher vomma but a more symmetrical vanna. (As a result, when traders are asked for a double no-touch, they are more concerned with vomma; when asked for a reverse knockout, they're still concerned with vomma but also rather more concerned—than with a no-touch—about vanna.)
More headaches
In the case of barriers, traders attempting to hedge the risks of vomma and vanna have the additional entertainment of coping with "barrier effects." Inevitably, certain spot levels are seen as especially significant for any of a number of reasons—breaking into new ground, old resistance, Fibonacci levels and so forth. Equally inevitably, barriers have a tendency to be clustered at those levels, and so various participants have a vested interest in attacking or defending them.
A good example of the sort of odd spot effects this causes was recently seen at 1.4650 in U.S. dollar/Canadian dollar. A trader who'd clearly written an option with a barrier at that level attempted to defend it. The market, observing an extremely large bid in front of the level, proceeded to deluge him in sales until the unfortunate trader threw in the towel. The market then bought back from him at a lower price as he unwound the position. The sudden and choppy spot moves (and attendant shifts in volatility) that result from this sort of activity make hedging for vomma and vanna a decidedly dynamic process.
This is obviously particularly tricky for large trades, which can also (rather surprisingly for foreign exchange) pose liquidity problems. Although the vanilla options market in many crosses is extremely deep, the effect of vomma and vanna can still pose something of a challenge. "If you sell $1 billion of a reverse knockout, you may well have to sell $3 billion of a particular strike to hedge some of your upside vega on it," says an exotics trader at a major European bank. "That's OK in something like euro/U.S. dollar, but not so clever in something like cable."
Different fish
Given the obvious importance of vomma and vanna in foreign exchange exotics, it appears surprising that option markets based on other securities take relatively little interest in them. They clearly have other fish to fry, however. "Fixed-income traders are much more concerned with aspects of the yield curve, which distracts them from options," says Empirica's Taleb. "Their lack of understanding may not matter, since the option dimension of things is not that important when compared with the yield curve."
Foreign exchange marketers have also had the benefit of experiencing a huge growth in discontinuous types of payoff products—digitals, reverse knockouts, double knockouts and now partial barriers, which have effectively enforced an understanding of these second-order derivatives. (The alternative is going broke.) Although discontinuous-payoff products obviously exist in equities and fixed income, they are far less prevalent. "The foreign exchange, interest rate and equity markets have all grown at different paces," says DerivaTech's Savery. "The foreign exchange market was in the right position to advance into these products and therefore had to learn the intricacies of DVega/dVol in order to survive."
Comparing the scale and complexity of typical trading books in the respective markets is also instructive. Although equity markets are often regarded as more sophisticated in terms of options than fixed income, their books (except for indices) usually consist of a lot of small, not particularly complex positions in a wide range of underlying securities. The net result has been that the market has grown more in the direction of correlation-based, rather than discontinuous-payoff, products. By contrast, in currency options people tend to have a small number of underlying securities and massively complex positions, often broken into only two or three big option books with a huge number of strikes. "That effectively compels them to study the intricacies of options," says Taleb.
In addition, the foreign exchange market, by virtue of its huge liquidity and price transparency, is in a strong position when it comes to taking a precise approach to these matters. "In foreign exchange, you can have a much sharper view. You're not saying, 'I think vomma/vanna will increase my price by roughly 30 basis points to 40 basis points; instead, you know it will change it between 32 basis points and 36 basis points,'" says Deutsche's Hoosenally. "You can't do that in a market where liquidity in the underlying vanilla instruments is patchy because market prices aren't as sharp. Fuzzy inputs beget a fuzzy result."
10.
What is the "Dogs of the Dow" strategy used in investing? Why does it work? It's a stock selection strategy based on dividend yield.
Dog Steps
Investing in the Dogs of the Dow is relatively simple. After the stock market closes on the last day of the year, of the 30 stocks that make up the Dow Jones Industrial Average, select the ten stocks which have the highest dividend yield. Then simply get in touch with your broker and invest an equal dollar amount in each of these ten high yield stocks. Then hold these ten "Dogs of the Dow" for one year. Repeat these steps each and every year. That's it!
If simplicity is what you are looking for, this is about as simple as it gets. One telephone call to your broker per year and your Dogs of the Dow portfolio is ready to go. And to make it even simpler, just select your Dogs of the Dow bookmark on the last day of the calendar year and the official Dogs of the Dow will be listed for your convenience. If you would like to be notified the moment that the Dogs of the Dow are revised, sign up to our Mailing List. It's Free!
Small Dog Steps
Some of you may be interested in trying to outperform even the traditional Dogs of the Dow. Well, we have a way that historically has done just that. On the last day of any given year, select the ten highest yielding stocks as you normally would. Of these ten Dogs simply select the five Dogs with the lowest stock price and you will have what we call the Small Dogs of the Dow (Sometimes referred to as the Puppies of the Dow or the Flying Five). Then get in touch with your broker and invest an equal dollar amount in each of these 5 high yielding, low priced stocks. Then hold these five "Small Dogs of the Dow" for one year. Investing in the Puppies of the Dow would have resulted in a 20.9% average annual return since 1973! (As reported in U.S. News & World Report, July 8, 1996)
The Cost of Ownership
Now that you know exactly how to invest in the Dogs of the Dow you should try to find a low cost method for upkeep. Basically one should consider a discount broker. Why pay for a full service broker if you already know which stocks you are going to buy? To get you started we suggest you take a look at Scottrade. At $7 to buy and $7 to sell each stock they are really hard to beat. A popular "discount" broker like Schwab will be several times more expensive. By the way, the Dogs of the Dow has no relation to Scottrade or any other broker for that matter and the Dogs will be quick to stray if a better deal can be found. [For more information on the leading deep discount brokers, try our Top Dog Brokers page.]
Beware of Dog
We here at the Dogs of the Dow take no responsibility for the performance of this high dividend yield investment technique. We are simply presenting this technique since it has historically outperformed the stock market as measured by the Dow Jones Industrial Average.
An important side note: Within the past 20 years there have been periods in which this investment technique has under performed the Dow as a whole. An investor should be aware that this is a long term investment strategy and no one should expect the Dogs to outperform the Dow each and every year.
11. What is the rule of 72 in interest rate compounding?
Within the financial community, the Rule of 72 is used as a quick and accurate tool to predict how fast your money will grow, how much interest you will need to earn to reach your goal and how inflation can affect your savings. Here's how it works:
- To find out how long it will take your money to double at various interest rates, take the number 72 and divide it by the interest rate. This will give you the number of years it will take your money to double. For example:
If you invested in a product with an 8% interest rate, it would take 9 years for any amount of money you put in that account to double: 72 divided by 8 = 9
- To find out the interest rate you would need to double your income within a certain period of time, take the number 72 and divide it by the number of years you want to invest. This will give you the interest rate you would need to double your money in that amount of time. For example:
If you wanted to double your income in 15 years, you would need to find a product which had an interest rate of 4.8%: 72 divided by 15 = 4.8
- For those of you that still may favor putting your savings under your mattress at home, the rule of 72 can also show you that at an inflation rate of approximately 5% per year, your money would be worth only half the original value in 14.4 years: 72 divided by 5 = 14.4
This formula assumes that the interest (or inflation) rate remains the same throughout the period. But, even with rate fluctuations, using average rates the Rule of 72 can give you relatively accurate information and be a helpful tool in your financial planning.
12. Why have copper prices quadrupled in the last 3 years?
Copper has quadrupled in the past five years as China used the metal to build factories and power-transmission lines.
13. What is the highest price that Silver ever sold for?
14. What is the highest price Gold ever sold for?
As a result of contributing to about 20 per cent of the global demand, prices of both standard and pure gold rallied to touch a historic high of Rs 6720 and Rs 6755 per ten gram respectively in the local bullion market during the year.
Similarly, silver also shot up in line with gold and recorded an all-time high of Rs 12,340 per kilo on frantic industrial and stockists' buying.
http://www.zeenews.com/znnew/articles.asp?aid=193319&sid =ZNS
15. When a country's currency weakens what generally happens to its exports?
The price of the export material falls. Import reduces and export increases.
16. What is a "Confirmed" Letter of Credit?
A letter of credit which a bank other than the bank that opened it agrees to honor as though they had themselves issued it. This additional confirmation is in addition to the obligation of the bank which issued the letter of credit.
17. What does "Laddering" in Certificates of Deposits mean? Why is it a good strategy??
CD laddering is a smart way to protect yourself against fluctuations in interest rates while giving you the security of knowing that you will be able to access at least some of your money within a relatively short time frame.
18. What significance does Gold/Silver price ratio have on the world economy?
19. Why is stagflation so hard to remedy?
http://www.springerlink.com/index/H5025462805UG581.pdf
Bahut bada funda hai. Yahin se pad lo..... .
20. If you purchased Bonds yielding 4% and interest rates go to 10%, what can you expect to sell the Bonds for?
Will ask you and decide the price. Then whats the use of getting a friend like you 😉
21. Why is "deadlock" good in any negotiations?
It is better to avoid deadlock in negotiation. In my opinion it is not good sorry.
22. What is the "put-aside" Gambit and why does it work in any negotiation?
😕
23. If I gave you tomorrow's newspaper today, how would you capitalize from the information to get the best IRR (Internal rate of return)?
By selling it to the kabariwaala
24. If your house's price doubled in 12 years, what was the rate of return on your money if had bought the house "Cash Down"?
100%
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