the info of MFE

LEARNING OUTCOMES – FINANCIAL ECONOMICS SEGMENT
A. Interest rate models
1. Evaluate features of the Vasicek and Cox-Ingersoll-Ross bond price models.
2. Explain why the time-zero yield curve in the Vasicek and Cox-Ingersoll-Ross bond price models cannot be exogenously prescribed.
3. Construct a Black-Derman-Toy binomial model matching a given time-zero yield curve and a set of volatilities.
B. Rational valuation of derivative securities
1. Use put-call parity to determine the relationship between prices of European put and call options and to identify arbitrage opportunities.
2. Calculate the value of European and American options using the binomial model.
3. Calculate the value of European and American options using the Black-Scholes option-pricing model.
4. Interpret the option Greeks.
5. Explain the cash flow characteristics of the following exotic options: Asian, barrier, compound, gap, and exchange.
6. Explain what it means to say that stock prices follow a diffusion process.
7. Apply Itô’s lemma in the one-dimensional case.
8. Apply option pricing concepts to actuarial problems such as equity-linked insurance.
C. Risk management techniques
1. Explain and demonstrate how to control risk using the method of delta-hedging.
Note: Concepts, principles and techniques needed for Exam MFE are covered in the reference listed below. Candidates and professional educators may use other references, but candidates should be very familiar with the notation and terminology used in the listed references. The # indicates new or updated material or changes in the sections selected.
Texts – Financial Economics Segment *
• # Derivatives Markets (Second Edition), 2006, by McDonald, R.L.,
Chapter 9,
Chapter 10, (excluding “Options on Commodities” on page 334),
Chapter 11, Sections 11.1 – 11.4, Appendices 11.A and 11.B,
Chapter 12, Sections 12.1–12.5, Appendix 12.A,
Chapter 13, including Appendix 13.B,
Chapter 14,
Chapter 20, Sections 20.1–20.6 (up to but excluding “Multivariate Itô’s Lemma” on pages 665-666) and 20.7 (up to but excluding “Valuing a Claim on SaQb on pages 670-672 and excluding “Finding the lease rate” on top one-half of page 669),
Chapter 21, Sections 21.1 – 21.2 (excluding “What If the Underlying Asset Is Not and Investment Asset” on pages 688-690) and 21.3 (excluding “The Backward Equation” on pages 691-692, and excluding the paragraph on page 692 that begins “If a probability…” and through the end of the section),
Chapter 22, Section 22.1 (but with only those definitions in Tables 22.1 and 22.2 that are relevant to Section 22.1),
Chapter 23, Sections 23.1 – 23.2 (up to but excluding “Exponentially Weighted Moving Average” on page 746 and through the end of the section),
Chapter 24, Sections 24.1–24.5 (up to but excluding “Forward rate agreements” on pages 806-808),
Appendix B.1, Appendix C, and including relevant Errata (see below).
Unless otherwise stated chapter appendices are not included in the required readings from this text.
*Any textbook errata are included below.
Study Notes - Financial Economics Segment
Title
Exam MFE/Exam 3F Tables
Some Remarks on Derivatives Markets
Derivatives Markets, Errata 2006 Second Edition, by R. McDonald,
http://www.kellogg.northwestern.edu/faculty/mcdonald/htm/typos2e.html
All released exam papers, since 2000 can be found here.
Exam MFE/3F Sample Questions and Solutions (1–49) - 02.23.09