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- What is a financial option? What is the single most important characteristic of an option?Black-Scholes Model Assume that you have been given the following information on Purcell Industries call options: According to the Black-Scholes option pricing model, what is the option’s value?How is the call option price impacted by varying the risk free rate of interest? How is the call option price impacted by varying the volatility?
- What is the effect of interest rate volatility on callable options and puttable options?a)explain the concept of the delta normal method for calculating VAR when options are present in the portfolio. b)explain the basic concepts of the historical method and the Monte Carlo simulation method of calculating VARs. c)discuss the benefits and limitations of VAR. d)define credit risk (default risk). e)explain how option pricing theory can be used in valuing default risk.Equating theoretical option price and the market option price, we can solve for implied indicators. Which is appropriate to be used as a quote for option? a) Implied strike price b) Implied volatility c) Implied risk-free rate d) None of the above
- Explain the The Martingale Property and its importance in the Black Scholes Option Pricing modelExplain 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.Discuss the payoff structures for call and put options and the determinants of call and put option prices. Explain how the option pricing theory can be applied in credit risk modelling.