Day 487

Ok.

Yesterday morning I did a little work.  Usually Fridays are my "productive no schoolwork day."  So in the morning I researched Aon Hewitt before my interview and did some dishes.  Then I went off to class.

In my first class we finished our discussion on "Bayesian Credibility Theory."  The entire idea of Credibility Theory is trying to determine the expected value of the next observation.  So... suppose that I work for an insurance company and we open a new line of business in a new state, such as Fire Insurance in the state of Delaware.  Well, I would want to determine how much to charge those people.  So suppose I just pick some amount to charge them, but I want to get a better price.  I also want to figure out how big I can expect each claim to be.  After the first 99 claims, I would probably want to estimate how big the 100th claim would be.  By using Credibility Theory, you could do that.  And after you've figured out the average claim size for fire insurance in Delaware, you could use Credibility Theory to help you figure out how big your overall expected claim size would be.... since 100 claims is not sufficient data.  You generally need 1092 to be 95% certain that your data is sufficient.

Then during my other class we discussed a new way of pricing derivative options on stocks, using the popular Black-Scholes formula.  Black-Scholes is really neat because it takes all of the input values that are needed (stock price, strike price*, volatility**, dividend yield, risk-free interest rate, and time until the option expires).  Using all of that data you can determine the price of a call or a put, which are the two basic derivative options.  It's much more concise than the formulas and methods we've been using.  It's not perfect, but as time has gone on people try and try again to make better models.

*The Strike Price is kind of a funny guy.  But here's how it works: it determines how much money you make.  Let's say that the stock price is $100 and the strike price (at the time when use our derivative option) is $75.  A call is an educated gamble that the stock price will be higher than the strike price.  So if you are correct (which in our example you were), you would make $25.  But if the stock price fell below $75, you would not make or lose anything.

**Volatility measures how much the stock prices change.  It is equivalent to the Standard Deviation of the prices over a given time period, usually a year or more.

So after my classes I went to go interview with Aon Hewitt.  Before it started one of the two people who conducted interviews came to talk with me.  So we just talked about our days and I asked a couple of questions about what to expect from the interview.  So then she took me up to talk with the actual interviewer.  I thought that it went well.  I was happy with most of my responses to the questions... and hopefully he was too!

When I got home Kimmy was at work.  I tried to have dinner ready when she got back, but there wasn't enough time.  So it was not ready.  Harumph.  Kimmy had a sandwich and corn, I made some spaghetti.  And then she had to go back to work.  After she left I did some budgeting.  Then I did some other chores, played a game, and then talked with Jared while I did a little grading.  When Kimmy got home we talked about our budget and groceries for the week.

And that about sums up my day yesterday!