The Monte Carlo method for pricing options is often referred to as a method of last resort. Explain why this might be the case, and when would an analyst use the Monte Carlo Approach to price a derivative?

Q: Describe each of the following derivative instruments and suggest a specific risky situation that…

A: All of these derivatives instruments defined below.

Q: Let C be the price of a call option to purchase a security whose present price is S.  Explain why C…

A: Options are derivative contracts and the amount that we pay to buy an option is called premium.

Q: What does vega measure? What can you tell from vega value? Can the vega of a derivatives portfolio…

A: Option gives right to buy or sell an underlying asset to the buyer of the option at strike price. A…

Q: Discuss the payoff structures for call and put options and the determinants of call and put option…

A: Since you have asked multiple question, we will solve the first question for you. If you want to any…

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: Compared to short hedging, the advantage to using a put option is: A. Put options involve a…

A: A put option is a contract giving the owner the right, but not the obligation, to sell 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: TRUE OR FALSE - brief explanation  As a call option is an option to buy and a put option an option…

A:

Q: What is a derivative and what is its purpose? Give an example of how a firm might use a derivative…

A: A derivative is a type of financial contract whose value is determined by the value of an underlying…

Q: options contracts

A: An option contract illustrates a two-party agreement that authorises a transaction on a certain…

Q: Evaluate the criticism that futures markets siphon off capital from more productive uses.

A: Future contracts are derivative instruments which are used for hedging the exposure of increase or…

Q: In a qualitative analysis, what factors affect the value of a real option?

A: An alternate choice that is accessible to the organization's managers taking investment…

Q: a) If you must buy some asset in future and you just want to hedge the risk what sort of derivative…

A: Hedging is the strategy that is generally used by the investor in order to reduce or off-set the…

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: Why are options being sold at prices higher than their strike value?

A: Option: An option is a special type of contract which gives its holder the right but not obligation…

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: hen comparing the forward hedge to the money market hedge, the MNC can easily determine which hedge…

A: Forward hedge hedge and money market hedge are two different methods of hedging.

Q: To hedge, a user of an energy resource wants price protection from rising prices. The user decides…

A: Options are the derivative instrument that can be used by the investors to hedge their risk of loss.…

Q: Explain the call-put parity relation and how it is justified. Black-Scholes-Merton formula uses…

A: A contract for an option grants the buyer the right to sell or buy the assets or securities at the…

Q: The futures market is referred to as an auction market, whereby producers and suppliers of…

A: A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at…

Q: how a firm might use a commodity derivative to reduce risk in its business? please include a…

A: In the world of derivatives, options etc. commodity derivatives are an important concept.…

Q: what are the advantages and disadvantages of covered call and protective put which are options…

A: Due to uncertain factors, security prices fluctuate regularly which creates risk for the investors.…

Q: Define Black-Scholes option pricing model

A: Assumptions of Black-Scholes option pricing models: There is no dividend during the lifetime of the…

Q: Explain with examples how a firm can hedge its risks using options

A: Hedging : Hedging can be understood as the  technique for risk management used to mitigate…

Q: The pay off from an option depends on the market price of the underlying asset a) a put holder…

A: The put option is a financial derivative instrument which derives its value from the underlying. A…

Q: Put–Call Parity - A put and a call have the same maturity and strike price. If they have the same…

A: Explanation : When share Put and Call having the same maturity & also Strike price is same then…

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: In the futures markets, arbitrageurs are mainly interested in: a. reducing their exposure to risk of…

A: Arbitrage in futures means taking the benefit of differential prices among different markets.

Q: Forwards and Futures: How are forwards and futures similar? How are they different? Briefly explain…

A: A forward contract is referred to the customized contract, which is between the two parties for…

Q: When comparing the forward hedge to the options hedge, the MNC can easily determine which hedge is…

A: The answer and the explanation can be seen below:

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: ich of the following inputs is not required to price option using the Black‐Scholes model?  a) the…

A: Introduction: The Black-Scholes model is a differential equation used in financial theory. The…

Q: What effect does Risk-free rate have on call option price?

A: Risk-free rate is the rate of return from an investment having no risk or zero risk. In other words,…

Q: What is the purpose of the Black–Scholes Option Pricing Model?

A: Black-Scholes is a pricing model used to determine the fair price or theoretical value for a call or…

Q: How should derivatives be used in risk management? What problems can occur?

A: Derivatives are financial instruments that have values derived from other assets like stocks, bonds,…

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: 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

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.