Interview Questions # 10:Option Pricing Applications
Team Latte Nov 14, 2007

In the BlackScholes formula for a vanilla call option the probability of being in the money almost equals the delta of the option when:
 the volatility is very low ;
 the volatility is very high;
 the volatility is very high and the risk free rate is low;
 the risk free rate is very low;

In an arithmetic average (asian) option, is the strike price and only one fixing is left out of a total of fixings. If is the average value of the underlying (spot) of all fixings until that point (here ) then the value of the asian option is equal to:
 times the value of the vanilla call with a strike of
 times the value of the vanilla call with a strike of
 times the value of the vanilla call with a strike of
 times the value of the vanilla call with a strike of

The supposedly absurd negative risk neutral probabilities can occur in a CoxRossRubenstein (CRR) binomial tree when:
 the volatility of the asset price is considerably less than the absolute value of the cost of carry times the square root of time step;
 the volatility of the asset price is considerably higher than the absolute value of the cost of carry times the square root of time step;

the volatility of the asset price is equal to the cost of carry;
 Risk neutral probabilities can never become negative in a CRR tree;

The sum of a digital call option and a digital put option (with the same strike price) is equal to:
 One
 the discount factor;
 the probability of being in the money for a vanilla call
 none of the above

An asset is said to be in a "degenerate" state when:
 the volatility is zero;
 the volatility is infinite;
 the volatility is negative;
 none of the above
Answers:
1 (a)
2 (a)
3 (a)
4 (b)
5 (a)
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