By doing this are we eliminating continuously compounding effect?

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Black Model Inputs |
|||||
---|---|---|---|---|---|

GPX Index |
X |
r |
σ |
T |
δ Yield |

187.95 | 180 | 0.39% | 24% | 0.36 | 2.2% |

Black Model Call Value |
Black ModelPut Value |
MarketCall Price |
MarketPut Price |
---|---|---|---|

$14.2089 | $7.4890 | $14.26 | $7.20 |

Option Greeks |
|||||
---|---|---|---|---|---|

Delta (call) |
Delta (put) |
Gamma(call or put) |
Theta(call) daily |
Rho (call)per % |
Vega per %(call or put) |

0.6232 | –0.3689 | 0.0139 | –0.0327 | 0.3705 | 0.4231 |

Solomon observes that the market price of the put option in Exhibit 2 is $7.20. Lee responds that she used the historical volatility of the GPX of 24% as an input to the BSM model, and she explains the implications for the implied volatility for the GPX.

Based on Solomon’s observation about the model price and market price for the put option in Exhibit 2, the implied volatility for the GPX is *most likely*:

- A.less than the historical volatility.
- B.equal to the historical volatility.
- C.greater than the historical volatility.

Can someone explain briefly?

**A is correct.** The put is priced at $7.4890 by the BSM model when using the historical volatility input of 24%. The market price is $7.20. The BSM model overpricing suggests the implied volatility of the put must be lower than 24%.

However, doesn’t cash dividend signal that the management does not have positive NPV projects to invest in, and hence is distributing earnings instead of reinvesting.

Can someone please explain?

]]>**Problem 1** -text says that option embedded bonds like callable and putable bonds are oriced with non path dependent model.

And MBS securities via path dependent

I am not able to understand the above.

**Problem 2- **In solving questions I came across that if interest rate volatility changes price of option free bonds will not change however price of option embedded bonds will change.

I dont understanbd why option free bond price not change on change in int rate volatility as if volatility changes it ultimately change the interest rate as well in the market na. And when interest rate change than price of bond will automaticaly change.

]]>a) Incerasing Duration.

b) Increasing Leverage to magnify returns.

How can increasing duration increase my returns in the above scenario ?? Because if my yield curve rises and I increase the duration of my portfolio, the value of my portfolio will fall and i will make losses…

Thanks in advance !

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