10) What does the comparison in (8) show? How does this relate to the Capital Asset Pricing Model?
11) Using the correlation matrix develop a model to simulate portfolio returns for solutions at 25% without risk free borrowing and without shortselling (i.e. questions 4). What is the probability that portfolio returns will fall below 20% or rise above 30%?. Question 2. Option Pricing You have been asked by a client to price out a number of possible options on a stock over a sixmonth period (125 days). The current stock price is $25, and its expected risk neutral drift rate is 5%/year. It is also known that the annual volatility is 35%.
A) What is the expected payoff to this option?______________.
B) What price would you charge the client for this protection before any transaction fees?__________
13) Your client then asked you to price an option that would payoff only if the average price over the 6 months was less than $20 (e.g. an Asian option).
A) What is the expected payoff to this option?______________. B) What price would you charge the client for this protection before any transaction fees?__________
14) The next option considered was even more exotic. Your client asked you to price an option which would trigger a European put option, with a strike price of $25, if and only if the lowest price observed in the last 30 days of trading was below $20.
C) What is the probability that the option will be exercised? ___________________
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