- CFA Exams
- Dec. 2020 Level 2
- Study Session 12. Fixed Income I
- Reading 33. The Arbitrage-Free Valuation Framework
Reading 33. The Arbitrage-Free Valuation Framework
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Learning Outcome Statements
| Reading 33. The Arbitrage-Free Valuation Framework | |
|---|---|
| 1. The Meaning of Arbitrage-Free Valuation a. explain what is meant by arbitrage-free valuation of a fixed-income instrument; b. calculate the arbitrage-free value of an option-free, fixed-rate coupon bond; | |
| 2. Interest Rate Trees and Arbitrage-Free Valuation c. describe a binomial interest rate tree framework; | |
| 3. Determining the Value of a Bond at a Node d. describe the backward induction valuation methodology and calculate the value of a fixed-income instrument given its cash flow at each node; f. compare pricing using the zero-coupon yield curve with pricing using an arbitrage-free binomial lattice; | |
| 4. Constructing the Binomial Interest Rate Tree e. describe the process of calibrating a binomial interest rate tree to match a specific term structure; | |
| 5. Pathwise Valuation g. describe pathwise valuation in a binomial interest rate framework and calculate the value of a fixed-income instrument given its cash flows along each path; | |
| 6. Monte Carlo Method h. describe a Monte Carlo forward-rate simulation and its application. |