QuestionWhich of the following statement(s) is/are true regarding a single-period binominal model with a time period h?I) If X is the expected payoff of a European option in the real world, then the price of the option can be obtained bydiscounting X at the risk-free interest rateII) To calculate the risk-neutral probability of an increase in stock price, the risk premium of the stock is neededII) In the risk-neutral world, the expected stock price at time h is the forward price for the stock delivering at time hPossible AnswersA 1) onlyB III) onlyC I) and II) onlyD 1) and III) onlyE None of the statement is true

The question is based on the fundamental principle for the valuation of derivative contracts, mainly…

Answered: Which of the following statement(s)…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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2. With the help of examples, explain how futures contracts can be used to reduce systematic risk in investors’ market portfolio, as well as to speculate. Detailed Explaination and Examples are needed.
Explain why an American call options on futures could be optimally exercised early while call options on the spot can not be optimally exercised. Assume that there is no dividend. Explain how to use call options and put options to create a synthetic short position in stock.
Which of the following strategy would you adopt if you expect the fall in prices of a stock? A. Buy a call B. Sell a call C. Sell a put D. Buy a future
4. Which of the below represents the value of an American option in each state? max(Payoff if exercised, Value if held) Payoff if exercised Risk-neutral probability min(Payoff if exercised, Value if held)
how to find the current market price of your market portfolio according to No Arbitrage condition? With weights (-0.6906057,1.21794211, 047266359) and expected returns (0.31%,2.1859%,1.4475%), where 0.31% is the risk free rate
Which of the following best describes an investor's risk-return trade-off function? Group of answer choices Indifference curves Capital Asset Pricing Model Characteristic line Efficient portfolio Arbitrage Pricing Model
Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier. Additionally, explain how might the magnitude of the market risk premium impact people's desire to buy stocks?
Which of the following is NOT always positively related to the price of a European call option on a stock? a) The time to expiration b) The volatility c) The risk-free rate d) The stock price
Consider a capital market with two securities. The payoffs of these securities in the two equally likely states of the world are given in the table below. Payoff Price Security A в State 1 State 2 PA = 2 Pg = 3 4 2 3 4 a) Discuss the concepts of complete capital markets, pure (Arrow-Debreu) securities, and pure factor portfolios. Establish whether the capital market in this case is complete and determine the prices of the pure securities by arbitrage.
Which of the following inputs is not required to price option using the Black‐Scholes model? a) the asset price b) the time to maturity c) the asset’s risk premium d) the risk‐free rate of interest
Using the Black-Scholes option pricing formula to determine how many of the following statements are false: [I] The higher the dividend payout, the cheaper the put option, all else equal [II] The put value decreases with volatility, all else equal [III] The lower the current stock price, the cheaper the put option, all else equal
(a) What is the expected shape of a futures curve for cotton (a storable commodity)? What about for live hogs (a non-storable commodity)? (b) Explain why a rational economic agent may still choose to hold stocks even if the expected return on stocks is negative.

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