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- a) 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.In binomial approach of option pricing model, fourth step is to create : a. equalize domain of payoff b. equalize ending price c. riskless investment d. high risky investmentWhich one of the following is the slope of the security market line? Market risk premium Risk-free rate Beta coefficient
- The slope of the security market line is the: Multiple Choice risk-free interest rate. reward-to-risk ratio. portfolio weight. beta coefficient.Compare and contrast the Spot market versus the Future market give examples.What is Sharpe ratio? Show the link between Sharpe ratio and best efficient portfolio.
- 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.Define Black-Scholes option pricing modelIf I have that the standard estimator of the volatility parameter is 0.2491, how can I estimate the drift parameter, mu, for some price paths assuming the price paths can be modeled by a risk-neutral geometric Brownian motion and the interest rate is 0? (I need to consider how the drift parameter is related to the volatility in a risk-neutral setting.)
- The security market line has a slope equal to the a) Risk-free rate b) Market risk premium c) Beta coefficient d) Market rate of return1. Explain how interest rate risk works?2. Explain the difference between a positively sloping and inverted (downward sloping) yield curve.3. What is the duration and why do we measure it?Expected utility theory in portfolio theory