# FR2208 Risk Analysis And Modelling For The Estimation Procedure

• Course Code: FR2208
• University: Monash University
• Country: Australia

## Questions:

a) Estimate and report the ML parameters, measured per annum, of a BSM model fitted to the strategy. In doing so, be very clear about the estimation procedure you apply, including any distributional assumptions, the definition of the sampling times, the sampling frequency, and what the resulting estimates are measured in. Using no more than 100 words, interpret the estimates.

b) Use the estimated BSM parameters to calculate the monthly expected value of the strategy at each date (month-end) in the sample period conditional on its value at the beginning of the sample period, i.e., 30 June 1980. Report the expected value of the strategy for
i) 31 December 1980,
ii) 31 December 1999,
iii) 31 December 2017.

c) Make a plot with the date (month-ends) on the x-axis and the strategy’s value on the y-axis. Add the expected monthly value as a function of the date to the plot and report the resulting plot. Finally, using no more than 100 words, describe and interpret the plot.

Question 2

Suppose you are currently standing at the end of the sample period, i.e., 31 December 2017.
a) Calculate and report the expectation and standard deviation of the value in 12 months.
b) Determine and report the distribution of the continuously compounded annual return over the next month and over the next 12 months. Using no more than 50 words, comment on- and explain any similarities and/or differences between these two distributions.
c) Calculate and report the value, r, such that there is only a 1% probability that the continuously compounded annual return over the next 12 months is below r.
d) Calculate and report the value, V, such that there is only a 1% probability that the value in 12 months is below V.

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