Sample Exam 1, Problem 1 Error
The solution to problem 1 on Sample Exam 1 was incorrect. This error went unnoticed for an entire sitting. Needless to say, the problem was tricker than I intended. I’ve uploaded a new video solution to this problem. I recommend you watch it.
No-arbitrage bounds with transaction costs
I recently contacted the author with a couple of questions regarding the no-arbitrage bounds with transaction costs derived on pages 138-139 in the DM textbook and he was kind enough to respond. Basically, the formula derivations assume one price for the stock at time T. That is natural for cash settlement, but not physical settlement where the arbitrager would be forced to trade at the bid and ask prices. (Even with cash settlement there can be some ambiguity about what price is being used to settle the transaction.) The author is going to post a typo that he is assuming cash settlement. In my sample exam, I also assume cash settlement.
I also asked about the sentence following formula 5.11 on page 139. The author agreed it was confusing and it will be removed from further editions. The author said he intended to imply that “the short rebate equaled the interest rate.”
Sample Exam #2 Errors
On #5, the correct answer wasn’t one of the choices. On #10, the key was wrong. I made the questions up and I still missed two.
All errors are being corrected now.
Two errors in A.6.P
On A.6.P #18, I took the derivate with respect to v instead of with respect to y. The correct solution is 11.32.
On A.6.P #20, there is a cash flow before the first liability (coupon payments), so full immunization is satisfied.
The handouts on all websites have been updated to reflect these corrections.