1/(1 + r)t is the formula for: Question 22 options: The compounding factor The risk-free interest rate Present value The discount factor
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1/(1 + r)t is the formula for:
Question 22 options:
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The compounding factor |
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The risk-free interest rate |
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Present value |
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The discount factor |
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- Q. Market rate of return is 18%, risk-free rate of return 8% and beta is 1.2 1. Calculate the required rate of return 2. Calculate risk premiumD3) Finance Consider an option with α being a non-negative parameter and the option pays ((S(T))α − K)+ at maturity date T. Let Cα(S(0), σ, r) be the risk neutral price of the option (with interest rate r and volatility σ) when the initial price is S(0). Obviously, C1(S(0), σ, r) = C(S(0), σ, r) is the price of an ordinary call option. Show that, Cα(S(0), σ, r) = e(α−1)(r+ασ2/2)TC((S(0))α, ασ, rα), where rα = α(r − σ2/2) + α2σ2/2.Q. The market rate of return is 14%, beta is 1.5 and the required rate of return is 18.5%. What is risk-free rate of return?
- Describe the effect of a change in each of the following factors on the value of a calloption:1. Stock price2. Exercise price3. Option life4. Risk-free ratewhich one is correct please confirm? QUESTION 27 The term structure of interest rates is related to the ____ risk premium. a. seniority b. marketability c. default d. maturitye) What is a constant dollar plan?f) What are the components of the risk-free rate?g) What is financial risk?h) If the standard deviation of a stock’s return is 5% and its expected return is 8%, what it the C.V.?
- What is the market Risk Premium? a. 3% b. 7% c. 10% d. 13% Option 2A. Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using: Compound interest? FV = (1 + I)NN / PV FV = PV / (1 + I)NN FV = PV x (1 + I)NN B. Simple interest? FV = PV + (PV x I x N) FV = PV - (PV x I x N) FV = PV / (PV x I x N) C. Identify whether the following statements about the simple and compound interest methods are true or false. Statement True False After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest. All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound…What impact does each of the followingparameters have on the value of a call option?(3) Option’s term to maturity
- which one is correct please suggest? QUESTION 35 The risk-free rate of return can be thought of as consisting of ____ and ____. a. unanticipated inflation; bond default premium b. a zero beta component; an expectation premium c. a real rate of return; an inflation premium d. a real rate of return; a default premiumAssume a security follows a geometric Brownian motion with volatility parameter = 0.2. Assume the initial price of the security is 21 and the interest rate is 0. It is known that the price of a down-and-in barrier option and a down-and-out barrier option with strike price 19 and expiration 30 days have equal risk-neutral prices. Compute this common risk-neutral price.Assume a security follows a geometric Brownian motion with volatility parameter sigma=0.2. Assume the initial price of the security is $25 and the interest rate is 0. It is known that the price of a down-and-in barrier option and a down-and-out barrier option with strike price $22 and expiration 30 days have equal risk-neutral prices. Compute this common risk-neutral price. I was able to do this problem, but have a question about the interpretation of my answer. I got an answer of $3.00 for the cost of the call option, but how do I answer "compute this common risk-neutral price"? Do I have to divide the answer my 2 for each of the barrier options and say the answer is $1.50? Or because of the fact that it says common does that mean to take the combined value of $1.50+$1.50 to get $3.00 as the answer? I'm just not sure if my answer to the question is $3.00 or $1.50. Does it all depend on the word "common"? Thanks for some clarification.
