Question #23

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 12

Status: Unattempted

Correct Answer: B

Part of Context Group: Q23-24 First in Group
Shared Context
- How many of Wood's notes regarding the Black model used to value interest options are correct? A) All three notes are correct. B) Only two of the notes are correct. C) Only one of the notes is correct.
Question
Newman's Comment 1 is best described as:
Answer Choices:
A. correct
B. incorrect as to the strike price of the options
C. incorrect as to the equivalence to a long FRA
Explanation
Newman has replicated a long FRA position (pay fixed receive floating). Long call, short put with same strike and expiry = Long FRA Short call, long put with same strike and expiry = Short FRA
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