EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Transcribed Image Text:What insights does the Black-Scholes option pricing model provide about financial
derivatives? The Black-Scholes model is a mathematical model used to determine the
fair price or theoretical value of a European-style option. It incorporates variables
such as the current stock price, option strike price, time until expiration, risk-free
rate, and stock volatility. The model assumes that stock prices follow a log-normal
distribution and that markets are efficient, with no transaction costs or taxes. While
originally developed for stock options, its principles have been extended to value
various types of financial derivatives. The Black-Scholes model revolutionized the
field of quantitative finance and played a crucial role in the growth of the derivatives
market. Despite its limitations and assumptions, it remains a fundamental tool in
options trading and risk management.
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- Explain in detail with an example how the change of the variables (like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration) of Black-Scholes-Merton Formula affect the price of the option.arrow_forwardWhat insights does the Black-Scholes option pricing model provide about financial derivatives? The Black-Scholes model is a mathematical model used to determine the fair price or theoretical value of a European-style option. It incorporates variables such as the current stock price, option strike price, time until expiration, risk-free rate, and stock volatility. The model assumes that stock prices follow a log-normal distribution and that markets are efficient, with no transaction costs or taxes. While originally developed for stock options, its principles have been extended to value various types of financial derivatives. The Black-Scholes model revolutionized the field of quantitative finance and played a crucial role in the growth of the derivatives market. Despite its limitations and assumptions, it remains a fundamental tool in options trading and risk management.arrow_forwardIn the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike pricearrow_forward
- Select the best answer with respect to a stock's "alpha"? (In a CAPM world) Group of answer choices The expected return on an asset relative to the expected return on the market The expected return on an asset relative to the riskiness of the asset The expected return on an asset relative to the risk free rate The expected return on an asset relative to what CAPM predicts for the asset's expected returnarrow_forwardThe below question is of the course "Financial Derivatives and Risk Management". 1. Explain the call-put parity relation and how it is justified. 2. Describe the five variables like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration that the Black-Scholes-Merton Formula uses to calculate the price of call and put options. 3. Explain how the change in these variables like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration affect the price of the option. 4. Explain how these variables like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration are grouped to show the put-call parity relationship and suggest the condition in which there is an arbitrage opportunityarrow_forwardWhat impact does each of the followingparameters have on the value of a call option?(1) Current stock pricearrow_forward
- Explain in your own words what dynamic hedging is, and how a trader could profit by dynamically hedging an option if they have a forecast of volatility that is different to implied volatility.arrow_forwardWhich of the following techniques is used to value stock options? a. Black-Scholes method b. Zero-coupon method c. Weighted-average method d. Expected earnings methodarrow_forwardWhich of the following is true: The BSM model combined with the put call parity can be used to give the theoretical price of an American put option. One of the variables that influences the price of the option is the expected return on the stock. Since dividends could trigger an early exercise of an American call, the BSM formula dividend adjustment will provide the correct price of an American call. The BSM formula requires cumulative probabilities from the lognormal distribution. The BSM model may be used with currency options by replacing the dividend yield with the foreign interest rate.arrow_forward
- The below question is related to the "Financial Derivatives and Risk Management". Describe the five variables like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration that the Black-Scholes-Merton Formula uses to calculate the price of call and put options. Provide an adequate assumptions to support your explanations.arrow_forwardWhen working with the CAPM, which of the following factors can be determined with the most precision? a. The beta coefficient of "the market," which is the same as the beta of an average stock. b. The beta coefficient, bi, of a relatively safe stock. c. The market risk premium (RPM). d. The most appropriate risk-free rate, rRF. e. The expected rate of return on the market, rM.arrow_forwarda) 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.arrow_forward
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