1. December 2, 2010MATH 2510: Fin. Math. 2 1 Hand-out Test Exam #1 w/ answers. Hand-written is what you get – for several reasons. Test Exam #2 (pink.) How do we play this? Cheat Sheet (yellow.) But for God’s sake don’t take the name literally. No course plan or slides.

2. December 2, 2010MATH 2510: Fin. Math. 2 2 Today: Swaps & Test Exam #1 Hull’s Chapter 7 on swaps in just two slides. There won’t be exam questions on swaps. Remaining parts of Test Exam #1 Question E. (When you’re are asked to “comment on” something, that something is usually wrong.) Question D. One formula you must learn by heart. You can get a lot of mileage out of it.

3. December 2, 2010MATH 2510: Fin. Math. 2 3 Hull’s Chapter 7: Swap contracts An agreement to exchange (”swap”) one series of payments for another – from simple to very complex. A forward is – by that definition – a swap. The ”plain vanilla” interest rate swap tranforms fixed interest payments into variable interest payments. (”Fixed for floating.”) Common. Swaps are frequently used across exchange rates.

4. December 2, 2010MATH 2510: Fin. Math. 2 4 W’s of Swaps What, I? Previous slide. How? A plain vanilla interest rate swap can be valued without a dynamic model. Surprising. Why? A comparative advantage argument. And its perils. What, II? Complex swaps. (Procter & Gamble swap, credit default swaps, …)

5. December 2, 2010MATH 2510: Fin. Math. 2 5 Exam Advice Be brief, be quick. It’s not a beauty contest – I can read my own hand-writing, I can sure as h*¤# read yours. Questions are independent, so if you get stuck, go on. Partial credit is given (a lot.) Give it the old college try.