Questions from Business Statistics

Q: Option traders sometimes refer to deep-out-of-the

Option traders sometimes refer to deep-out-of-the-money options as being options on volatility. Why do you think they do this?

Q: A European call option on a certain stock has a strike price

A European call option on a certain stock has a strike price of $30, a time to maturity of 1 year, and an implied volatility of 30%. A European put option on the same stock has a strike price of $30,...

Q: Suppose that the result of a major lawsuit affecting a company is

Suppose that the result of a major lawsuit affecting a company is due to be announced tomorrow. The company’s stock price is currently $60. If the ruling is favorable to the company, the stock price i...

Q: ‘‘The Black–Scholes–Merton model is used by traders

‘‘The Black–Scholes–Merton model is used by traders as an interpolation tool.’’ Discuss this view.

Q: Using Table 20.2, calculate the implied volatility a trader

Using Table 20.2, calculate the implied volatility a trader would use for an 8-month option with K=S0 ¼ 1:04.

Q: ‘‘Resecuritization was a badly flawed idea. AAA tranches created from

‘‘Resecuritization was a badly flawed idea. AAA tranches created from the mezzanine tranches of ABSs are bound to have a higher probability of default than the AAA-rated tranches of ABSs.’’ Discuss th...

Q: The market price of a European call is $3.00

The market price of a European call is $3.00 and its price given by Black–Scholes– Merton model with a volatility of 30% is $3.50. The price given by this Black–Scholes–Merton model for a European put...

Q: Explain what is meant by ‘‘crashophobia.’’

Explain what is meant by ‘‘crashophobia.’’

Q: Which of the following can be estimated for an American option by

Which of the following can be estimated for an American option by constructing a single binomial tree: delta, gamma, vega, theta, rho?

Q: A 9-month American put option on a non-dividend

A 9-month American put option on a non-dividend-paying stock has a strike price of $49. The stock price is $50, the risk-free rate is 5% per annum, and the volatility is 30% per annum. Use a three-ste...