Questions from Business Statistics

Q: Calculate u, d, and p when a binomial tree is

Calculate u, d, and p when a binomial tree is constructed to value an option on a foreign currency. The tree step size is 1 month, the domestic interest rate is 5% per annum, the foreign interest rate...

Q: Suppose that a bank buys an option from a client. The

Suppose that a bank buys an option from a client. The option is uncollateralized and there are no other transactions outstanding with the client. The expected values of the option at the midpoint of y...

Q: Explain why an American option is always worth at least as much

Explain why an American option is always worth at least as much as a European option on the same asset with the same strike price and exercise date.

Q: ‘‘Speculation in futures markets is pure gambling. It is not

‘‘Speculation in futures markets is pure gambling. It is not in the public interest to allow speculators to trade on a futures exchange.’’ Discuss this viewpoint.

Q: Explain why an American option is always worth at least as much

Explain why an American option is always worth at least as much as its intrinsic value.

Q: It is July 16. A company has a portfolio of stocks

It is July 16. A company has a portfolio of stocks worth $100 million. The beta of the portfolio is 1.2. The company would like to use the December futures contract on a stock index to change the beta...

Q: What is meant by the ‘‘delta’’ of a stock option?

What is meant by the ‘‘delta’’ of a stock option?

Q: A company that is uncertain about the exact date when it will

A company that is uncertain about the exact date when it will pay or receive a foreign currency may try to negotiate with its bank a forward contract that specifies a period during which delivery can...

Q: What are the formulas for u and d in terms of volatility

What are the formulas for u and d in terms of volatility?

Q: Consider the situation in which stock price movements during the life of

Consider the situation in which stock price movements during the life of a European option are governed by a two-step binomial tree. Explain why it is not possible to set up a position in the stock an...