Can you please answer aswer all these questions for me please 1A. A security tha
ID: 2734294 • Letter: C
Question
Can you please answer aswer all these questions for me please
1A. A security that is sub-divided into securities called tranches is called a
a. principal-only strip b. Asian lookback option c. range mortgage strip
d. collateralized mortgage obligation e. none of the above
1B. The standard normal random variable used in the calculation of cumulative normal probabilities within the Black-Scholes-Merton option pricing model is
a. the lognormal distribution b. the d1 and d2 statistic c. the z statistic
d. the f distribution e. none of the above
1C. What happens when the volatility is zero in the Black-Scholes-Merton model?
a. the option price converges to either zero or the lower bound
b. the option price converges to the intrinsic value
c. the option automatically expires out of the money
d. the gamma and delta converge
e. none of the above
1D. A portfolio that combines the underlying stock and a short position in an option is called
a. a risk arbitrage portfolio b. a hedge portfolio c. a ratio portfolio
d. a two-state portfolio e. none of the above
Explanation / Answer
1A. Collateralized mortgage securities are the securities which when sub divided into different levels are called tranches. So option D is correct.
These used mortgage as collateral against the loan
1B. The Black Scholes formula for option pricing calculation is as follows
Here cumulative normal probabilities is calculated for D1 and D2 statistic. So option B is correct
1C. Using black holes formula, we cannot get the answer for this question since 0 volatility means, D1 and D2 are infinite
When there is zero volatility, which is practically impossible. This is possible only in theory.
The volatility is zero in the Black-Scholes-Merton model the option price converges to either zero or the lower bound. So option A is correct
1D. A portfolio that combines the underlying stock and a short position in an option is called covered call position and is referred to as Hedged position. So option B is correct.