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4. If the market price for an option is lower than what the value is from using the binomial
model what would you do?
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- What impact does each of the followingparameters have on the value of a call option?(4) Risk-free rateSuppose stocks X and Y have equal current prices but different volatilities of returns, ax < øy; what would be more expensive: a call option on X or Y? Please discuss.Compare the binomial and Black-Scholes option pricing models. What are their differences and similarities? In what circumstances would you prefer one versus the other? Support your arguments using references.
- If I have that the standard estimator of the volatility parameter is 0.2491, how can I estimate the drift parameter, mu, for some price paths assuming the price paths can be modeled by a risk-neutral geometric Brownian motion and the interest rate is 0? (I need to consider how the drift parameter is related to the volatility in a risk-neutral setting.)1. Explain how interest rate risk works?2. Explain the difference between a positively sloping and inverted (downward sloping) yield curve.3. What is the duration and why do we measure it?Compare the binomial and Black-Scholes option pricing models. What are their differences and similarities? In what circumstances would you prefer one versus the other? Use real market data as well as academic references.
- 1. What are the recommended options strategies when you expect the market has extreme (high) volatility?a) discuss the relationship between the up-factor (u), down-factor (d), risk-free rate (r), and binomial probability (p) in the binomial model. b) discuss the assumptions in Black-Scholes-Merton model (BSM) from memory. c) discuss the variables in the BSM formula and explain how they affect call option pricing. d) define historical volatility and implied volatility. e) demonstrate how to reduce risk with gamma hedging.Think about whether a risk-free asset should earn a risk-premium beyond the risk-free rate. Thinking about that should give you an idea of the beta for a risk-free asset. Or, look again at the CAPM equation: E(Ri)=Rf+βi[E(RM)−Rf] Given this equation, what beta sets the E(R) of the risk free asset equal to the risk-free rate? A) zero B) 0.5 C) 1.0 D) its random
- 2. In the context of binomial option pricing model, a decrease in the stock price volatility will reduce the current option value True or falsefill the missing words: a. For ( ) options, when the spot price is ( ) than(or equal to)the exercise price, then profit/loss equals the premium. b. For ( ) options, when the spot price is ( ) than (or equal to) the exercise price, then the profit/loss will be equal to the option premium.R2 With reference to the Black Scholes model, explain the concept of risk neutral valuation. Outline theMonte Carlo valuation procedures. Use the Monte Carlo method to price an option of your own choice,compare the obtained price with the market price, and discuss your results NOTE:answer to the question plz