Question: (a) Explain how you would use simulation (Monte Carlo) analysis in interest rate risk modelling, and explain the main differences between analytic models and simulation

(a) Explain how you would use simulation (Monte Carlo) analysis in interest rate risk modelling, and explain the main differences between analytic models and simulation models. (5 marks) (b) Describe how you would use the Top-Down approach to risk management. (5 marks) (c) Explain how hedging can lessen the problems of underinvestment and financial distress. (5 marks) (d) With interest rate risk, discuss the conditions where pre-payment risk would arise, and how do financial institutions try to mitigate this risk. (5 marks)

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