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 Interview Questions # 10:Option Pricing Applications Team LatteNov 14, 2007 In the Black-Scholes 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 Cox-Ross-Rubenstein (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) Any comments and queries can be sent through our web-based form. More on Job Interviews >> back to top   