Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter23:EstimatingVolatilitiesandCorrelationsMultipleChoiceTestBank:QuestionswithAnswers1.HowmanyparametersarenecessarytodefineanEWMAmodelA.1B.2C.3D.4Answer:AOneparameter(lambda)isnecessarytodefineanEWMAmodel.2.HowmanyparametersarenecessarytodefineaGARCH(1,1)modelA.1B.2C.3D.4Answer:CThreeparameters(omega,alpha,andbeta)arenecessarytodefineaGARCH(1,1)model.3.AttheendofThursday,theestimatedvolatilityofassetAis2%perday.DuringFridayassetAproducesareturnof3%.AnEWMAmodelwithlambdaequalto0.9isused.WhatisanestimateofthevolatilityofassetAattheendofFriday?A.2.08%B.2.10%C.2.12%D.2.14%Answer:CThevariancerateis0.9×0.022+0.1×0.032=0.00045.Thevolatilityperdayisthesquarerootofthisor2.12%.4.AttheendofThursday,theestimatedvolatilityofassetBis1%perday.DuringFridayassetBproducesareturnofzero.AnEWMAmodelwithlambdaequalto0.9isused.WhatisanestimateofthevolatilityofassetAattheendofFriday?A.0.98%B.0.95%C.0.92%D.0.90%Answer:BThevariancerateis0.9×0.012+0.1×0.02=0.00009.Thevolatilityperdayisthesquarerootofthisor0.95%.5.AttheendofThursday,theestimatedcovariancebetweenassetsAandBis0.0001.DuringFridayassetAproducesareturnof3%andassetBproducesareturnofzero.AnEWMAmodelwithlambdaequalto0.9isused.WhatisanestimateofthecovarianceattheendofFriday?A.0.000090B.0.000081C.0.000100D.0.000095Answer:AThecovarianceis0.9×0.0001+0.1×0.03×0=0.000090.6.WhichofthefollowingisadefinitionofthecovariancebetweenXandY?A.CorrelationbetweenXandYtimesvarianceofXtimesvarianceofYB.VarianceofXtimesthevarianceofYC.CorrelationbetweenXandYdividedbytheproductofthestandarddeviationofXandthestandarddeviationofYD.CorrelationbetweenXandYtimesstandarddeviationofXtimesstandarddeviationofYAnswer:DCovarianceisthecoefficientofcorrelationmultipliedbytheproductofthetwostandarddeviations.7.WhatdoesEWMAstandfor?A.EquallyweightedmovingaverageB.EquallyweightedmedianapproximationC.ExponentiallyweightedmovingaverageD.ExponentiallyweightedmedianaverageAnswer:CEWMAstandsforexponentiallyw...
