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
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
Chapter6: Risk And Return
Section: Chapter Questions
Problem 1Q
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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.
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