31: Valuation of contingent claims Flashcards
1
Q
The “Greeks” are sensitivity factors that capture the relationship between:
A
each input (except the exercise price)
&
option price
2
Q
European options can be exercised:
A
only at maturity
3
Q
Implied volatility is a measure of:
A
estimated future volatility (exercise price & time to expiration)
&
market price risk
4
Q
Implied volatility is a component of:
A
as a component of an option pricing model
not calculated on the basis of historial volatility of a stock price
5
Q
Volatility skew tends to steepend when:
A
Market price of hedging is rising
causing its shape to be different from the volatility smile
6
Q
Assumptions of BSM:
A
- Stock prices are lognormally distributed
- volatility of underlying is constant & known (not random)
- risk-free rate is constant & known (not random)
