Answered: ich of the following inputs is not…

ich of the following inputs is not required to price option using the Black‐Scholes model? a) the asset price b) the time to maturity c) the asset’s risk pre

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 6MC

See similar textbooks

Related questions

Q: Discuss the factors giving rise to an inverted futures market for a storable versus a non-storable…

A: The inverted futures market for storable goods exists when the short-term deal costs are more…

Q: hy not?

A: Introduction : A forward contract can be seen as a private, customizable contract which is exchanged…

Q: How is the call option price impacted by varying the risk free rate of interest? How is the call…

A: 1) Call option is the contract according to which the buyer of the option has the right but not the…

Q: Which of the following is true about derivatives? a. Value of derivative is derived from…

A: Correct Answer = Option A = Value of derivative is derived from predetermined asset Explanation

Q: Which of the following is NOT an external method of interest rate risk management? * A. Using…

A: An interest rate risk is the risk of negative affected of the value of an investment by unexpected…

Q: Which of these will increase the value of a call option? I. An increase in the market value of the…

A: Call Option: Options on stocks, bonds, commodities, and other assets or instruments are financial…

Q: Which of the following best describes the intrinsic value of an option? The…

A: Intrinsic Value of an Option: Intrinsic value can be described as a measure of the worth of an…

Q: The market price paid for an option is best defined as: a. The strike price of the option b. The…

A: Options are of two types Call and put

Q: Define a call option’s exercise value. Why is the actual market price of a call optionusually above…

A: Option contracts are the financial derivative instruments which gives the right but not obligation…

Q: Explain why speculating in derivatives, futures contracts and options is not appropriate for the…

A: Speculation regulates the international financial system. Future action in stock market is dependent…

Q: Basis risk refers to the risk: a. associated with unanticipated price movements on the underlying…

A: Basis risk = spot price of underlying instrument - future price of the underlying instrument.…

Q: Identify the fundamental distinction between a futures contract and an option contract, and briefly…

A: Fundamental difference between a futures and option contract lies in following parameters:…

Q: Define a call option’s exercise value. Why is the market price of acall option always above its…

A: Answer: A call option is basically a deal that gives the option buyer the right to purchase…

Q: . What exposure does the writer of a put option have when the opti The obligation to buy the asset…

A: A put option is an instrument which provides its holder an option to sell an underlying asset on a…

Q: (Based on Appendix 12B) When market rates of interest rise after a fixed-rate security is purchased,…

A: Held-to-maturity security: The debt securities which are held by the investor with intent to hold…

Q: Which of the following is not a discounted technique Select one: a. Net present value b. Discounted…

A: Discounted technique is a technique to determine the present value of future cash flows.

Q: The major difference between futures and options arises from the different obligations of buyers…

A: In futures contract, both the buyer and seller of the contract are obligated to buy and sell the…

Q: A position in T-bond futures should be used to hedge falling interest rates and a position in T-bond…

A: A long position in a financial instrument means the holder of the position owns a positive amount of…

Q: Which of the following increases basis risk? Select one: O a. A large difference between the futures…

A: Basis risk refers to the type of financial risk which arises due to a mismatch in the hedge…

Q: Which of the following are NOT the determinants of option prices? Select one: i. Average return ii.…

A: Solution: Option are one of the derivatives which grant a right to option holder to buy or sell the…

Q: which one is correct please confirm? Q2: "An increase in the volatility of the underlying asset,…

A: if we applied in options the higher the given shift over then the given time period, the higher the…

Q: Which of the following is/are true about the current market value of a derivative instrument?…

A: Derivative instruments are those instruments which derive their value from an underlying asset like…

Q: If the time to expiration falls and the put price rises, then what has happened to the put option’s…

A: Options are derivative contracts, it gives an investor the right (but not obligation) to buy/sell an…

Q: "Financial Derivative and Risk Management" Why are the probabilities of stock price movements not…

A: Option prices are basically the sum of the intrinsic and time value of an option. The price…

Q: Which derivative does not reduce financial risk? a. options b. swaps c. futures d.forwards e.…

A: Financial derivative is referred as the financial instrument, which can link to the particular…

Q: Payoff from entering into a forward contract does the buyer have more to gain going long than the…

A: Forward contract is the contract which allows a buyer to buy a certain stock or other assets while a…

Q: The price level you choose for price protection on a call option is referred to as: A. The strike…

A: Call Option is taken when it is expected that price will rise in the future. It is exercised when…

Q: Equating theoretical option price and the market option price, we can solve for implied indicators.…

A: Option price is based on 1) Strike price 2) volatility 3) risk free rate 4) spot price

Q: Can default risks be adequately covered by the choice of a suitably high interest rate compared to…

A: Yes, Default risks can be adequately covered by choice of high interest rates in comparison to the…

Q: The Monte Carlo method for pricing options is often referred to as a method of last resort. Explain…

A: Monte Carlo Simulation: It is a method that is used to model the probability of different outcomes…

Q: When the price of the underlying financial instrument exceeds the exercise [strike] price of a call…

A: An option is a financial derivative that represents a contract that the option writer sells to the…

Question

Which of the following inputs is not required to price option using the Black‐Scholes model?

a) the asset price

b) the time to maturity

c) the asset’s risk premium

d) the risk‐free rate of interest

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

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
Which of the following best describes the intrinsic value of an option? The Black-Scholes-Merton price of the option The value it would have if the owner had to exercise it immediately or not at all The amount paid for the option The lower bound for the option’s price
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?
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.
How is the value of a financial option affected by(a) the current price of the underlying asset, (b) theexercise (or strike) price, (c) the risk-free rate,(d) the time until expiration (or maturity), and(e) the variance of returns on the asset?
Real Options & Game Theory: The value of a call option and a put option is influenced by the following variables: - Underlying asset value- Strike Price- Variance of Underlying asset- Time to Expiration What effect would an increase in each of these variables have on the value of a calloption and a put option?
Define a call option’s exercise value. Why is the market price of acall option always above its exercise value?
Which of the following are NOT the determinants of option prices? Select one:i. Average returnii. Time to maturityiii. Underlying priceiv. Interest ratesv. Exercise pricevi. Volatility
The price level you choose for price protection on a call option is referred to as: A. The strike price B. The option premium C. The time value D. The intrinsic value
Which of the following statements is true about call options? A.The holder of the option profits when the price of the underlying asset increases. B.It gives to the buyer of the option the right to sell a financial instrument within a specific time period, at a specified price. C.The holder of the option will exercise the option only if the price of the underlying asset is smaller than the strike price. D.The holder of the option receives a premium for writing the option.
From a credit risk perspective, why will a futures contract be less exposed as compared to a forwardcontract and why not?
Describe the five variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) that Black-Scholes-Merton Formula uses to calculate the price of call and put options. Explain how the change in these variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) affects the price of the option.