Mr. Feldblum will teach the first three days and Prof. Ostaszewski will teach the remaining 2 days.

The Exam 8 syllabus was completely revised in 2000, reflecting the new emphasis on financial engineering. Mastering chapters 9 through 14 of Options, Futures, and Other Derivatives, the valuation of bonds with embedded options in the Fabozzi Handbook, or the papers by Butsic, Cummins, Black, Miller, and Stulz requires keen understanding of no-arbitrage pricing and risk neutral valuation.

The Exam 8 seminar is structured to meet the difficulty of this exam. The instructors are experts in financial analysis and investment theory, with extensive experience in teaching actuarial seminars. Mr Feldblum has taught over 115 actuarial seminars during the past eleven years, as well as the advanced DFA seminars for the CAS. Prof Krzys Ostaszewski is an outstanding research actuary, who teaches investment strategy, asset liability management, pension funding, and actuarial mathematics for NEAS and other organizations (SOA Courses 3, 4, 6, and 8). Mr. Feldblum teaches the first three days of the Exam 8 seminar and Dr. Ostaszewski teaches the remaining two days.

NEAS provides extensive study aids for Exam 8, with emphasis on the more difficult readings, such as:

• An extensive set of study aids on options pricing, 475+ pages of practice problems with model solutions, covers Hull’s textbook: forward and futures contracts; forward rate agreements; Treasury bond futures; put call parity; payoff diagrams; spreads; butterflies, straddles, strangles; option deltas; binomial tree pricing; risk-neutral valuation, geometric Brownian motion; Black-Scholes formula; options on indices and currencies; value at risk; the "Greeks"; interest rate swaps; foreign currency swaps; options hedging.
• Embedded Options covers callable and putable bonds, explaining how to calculate forward rates and value embedded calls and puts. The practice problems and illustrative test questions in the study aid are taken from Fabozzi’s textbooks for the CFA syllabus.

• Butsic and the Expected Policyholder Deficit reviews his Solvency Measurement paper, explaining the calculation of risk-based capital using the expected policyholder deficit and the square root approximation for multiple risk elements. Extensive practice problems and model solutions to past CAS exam problems.
• Valuations and Appraisals covers the statement of principles, the standard of practice, and the Miccolis reading, along with background from the Sturgis paper to answer the likely exam questions.

For optimal exam preparation, participate in the on-line Exam 8 seminar (on the NEAS discussion forums) from its inception in December 2007 through the final week of study in April 2008.

Summaries of the seminar sessions are presented below. Mr. Feldblum teaches sessions 1 – VI;  Dr.Ostaszewski teaches sessions VII – X. The material is illustrated with problems from a variety of sources:

• past CAS and SOA exam problems
• practice problems designed by the instructors for the Exam 8 seminar
• past exam problems from 14 years (1992-2005) of CFA Level 2 and Level 3 exams
• exercises from textbooks on options pricing, financial engineering, and portfolio management

Session I: Working with Derivatives 

1. Futures: markets and contracts; margins; settlement; hedging and hedge ratios
2. Forward Contracts: Investment assets versus commodities; forward prices and risk free rates; coupons and dividend yields; future and forward prices; futures on stock indices and currencies; futures on commodities; carrying costs
3. Duration and Futures: forward-rate agreements; Treasury bond futures; cheapest to deliver bonds; hedging strategies using duration
4. Options Markets: Regulations; commissions, margins; Options Clearing Corporation
5. Option Prices: price bounds; put-call parity; American vs European options; dividend paying stocks and early exercise

1. Expected Policyholder Deficit: put option and the corporate shield; call option held by insurer’s owners; risk-based guarantee fund premium; measurement bias and market value; time-dependence; valuation horizon; covariance and the square root rule; normal and lognormal distributions; level-playing field
2. EPD and capital requirements: quantifying the EPD; EPD ratio; required capital to achieve specified ratio; risky liabilities vs assets; risk combinations; discrete vs continuous distributions; balance sheet structure of risk correlations; square root formula
3. Cummins on Capital allocation
4. Nakada, Shah, Koyluoglu, and Collignon on P&C RAROC
5. Bodie, Kane, and Marcus appendices: 6A, 8B, 8C: insurance vs investment risk; law of large numbers; pooling vs risk transfer; diversification

1. Trading strategies: bull spreads; bear spreads; butterfly spreads; calendar spreads; diagonal spreads; straddles; strips and straps; strangles
2. Binomial tree pricing model: risk-free hedging portfolio; actual vs martingale probabilities; risk-neutral valuation; single step European options; multi-step binomial trees; American options; option deltas; volatilities

1. Stochastic processes: Markov models and generalized Wiener processes; volatilities and standard deviations; geometric Brownian motion; Ito processes and Ito’s Lemma
2. Equity Valuation Models. Balance sheet valuation models (book value, liquidation value, and replacement cost); intrinsic value versus market price; dividend discount models (constant growth and multistage growth models); price-earnings (P/E) ratio and pitfalls of P/E analysis; free cash flow approach; inflation and equity valuation; aggregate market behavior (explaining the past; forecasting the market).

1. Black-Scholes: Continuous compounding; force of interest; lognormal distributions; expected rates of return for skewed distributions; empirical volatility; implied volatility; no-arbitrage derivation of Black-Scholes; risk-free valuation perspective
2. Using Black-Scholes to price European calls and puts: warrants; dividend paying stocks; Black’s approximation; American call and put options
3. Fischer Black on the Holes in Black-Scholes: volatility changes; jumps; interest rate changes; borrowing penalties; short-selling penalties; trading costs; taxes; dividends; early exercise; takeovers; portfolio insurance; mean reversion
4. Fabozzi: Valuation of Bonds with Embedded Options: callable and putable bonds; forward rates; bootstrapping; interest-rate trees, interest rate volatility, and standard deviations
5. Binomial lattices: Valuing optionless bonds with stochastic interest rate paths; iterative binomial trees; embedded calls and puts; option-adjusted spread; effective duration; effective convexity

1. Hull on the Greeks: Delta hedging; stock puts and portfolio insurance; covered calls; Hull’s stop loss strategy; gamma hedging; theta; vega; double hedging with gamma and vega; rho; relations of call and put options; scenario analysis; implied stock volatility
2. Miller, Culp, and Neves on uses and abuses of Value at Risk
3. CAS Statement of Principles: cash flows vs accounting entries; statutory vs GAAP earnings; deterministic scenarios vs stochastic modeling; cash flows (company-equityholders vs company-policyholders); expected dividend streams; risk-adjustments; adjusted net worth (market value adjustments vs goodwill); value of existing business and of new business; franchise value of distribution systems; allocation of assets; market value adjustments vs discounted value of future cash flows; lapsation; sensitivity testing; cost of capital; basis of assumptions
4. The AAA Standard: assets, considerations, and obligations; contingent events; cash flows: occurrence, amount, and timing
5. René Stulz on Rethinking Risk Management: the Metallgesellschaft case; the Daimler-Benz case; bankruptcy costs; stakeholder costs; taxes; comparative advantage; risk-taking and capital structure; management incentives; value at risk; cash flow simulations; default probabilities
6. Miccolis: [Background: dividend stream, future earnings, and cost of capital; synergism; tax consequences; cash flow valuation] adjusted net worth; statutory vs tax accounting; value of future earnings; reserve runoffs; retention rate; new business; market, industry, company, and timing risks; cost of capital; Miccolis vs ASoP on cost of capital; stochastic modeling; confidence levels; risk models
7. Altman on Corporate Bond Mortality: cumulative mortality rates; default rates; construction of the bond mortality table; initial bond rating and age since issue; recovery rates; net spreads

Hull, chapter 14: Definition of value at risk. Methods of calculation of VAR: assuming normal distribution and linearity, approximation, simulation, using historical data. Handling of interest rates, principal components analysis.

Insurance securitization and financial risk manage-ment for insurers; evolutionary development of securitization; factors leading to expansion of insurance securitization; securitized products; cat bond offerings; risk of insurance derivatives

Session X: International Diversification:

 International investments; calculating the return on foreign investments; risk of foreign securities; returns from international diversification; effect of exchange rate risk; evidence on internationally diversified portfolios; techniques for investing internationally (direct investment, American depository receipts, mutual funds); passive and active international investing.