Option Pricing 2

malika.aggarwal
Posts: 3
Joined: Wed Sep 12, 2012 11:54 am

Option Pricing 2

Postby malika.aggarwal » Sat Oct 20, 2012 2:31 pm

Hello,
Please help me with these questions..

1) Which one of the following statements on hedging exotic options is incorrect?
Choose one answer.
a. Asian options are more difficult to hedge because they have more extreme gamma towards expiration Correct
b. The portfolio constructed using static option replication must be unwound when any part of the boundary is reached. Incorrect
c. The approach of static options replication is to find a portfolio of regular options whose value matches the value of the exotic option on some boundary. Incorrect
d. Barrier options are more difficult to hedge because delta is liable to be discontinuous at the barrier. Incorrect
The correct answer is Asian options are more difficult to hedge because they have more extreme gamma towards expiration.


2) Which one of the following statements is incorrect regarding the properties of volatility smiles?
Choose one answer.
a. Referring to the volatility smile of foreign currency options, implied volatility of at the money options is relatively low and it becomes higher for the deep in the money options and deep out of the money options. Incorrect
b. The implied volatility of equality options increases as the strike price increases. Correct
c. One possible reason for the smile in equity is that people are concerned about stock market crashes. Incorrect
d. A volatility smile in foreign currency options exists because traders think that the lognormal distribution under estimates the likelihood of an extreme exchange rate movement. Incorrect
The correct answer is The implied volatility of equality options increases as the strike price increases.

Please explain me the answers...

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Option Pricing 2

Postby content.pristine » Fri Nov 02, 2012 8:21 pm

Hi Mallika,

Exotic Options and Volatility Smiles are part of the FRM-II syllabus
8-)


Return to “FRM Part I”



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