AIM 1: Understand the natural logarithm, differentiation and Taylor series, and distinguish between expectation and variance.
1、Consider a portfolio of derivatives on fixed income securities and interest rates. If a Taylor Series approximation is used to estimate the delta normal value at risk for the individual derivatives in the portfolio, which of the following positions will have a substantially improved estimate of value at risk?
- Interest rate cap on 3-month LIBOR
- Forward rate agreement on 6-month LIBOR
- 6-month call option on Treasury bonds
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