1. Describe in detail the role of the derivative markets in the financial markets. (Answer must be 150 words minimum to get credit.
2. Explain the following: (a) standardization of contracts on derivative exchanges (minimum 50 words to get credit) (b) the role of the clearinghouse for the derivative exchanges (minimum 50 words to get credit) and (c) daily settlement on an exchange. (minimum 50 words to get credit)
3. Describe why an option’s time value nearly fades when the option is deep-in-the-money or out-of-the-money and why it is greatest when the stock price is near the exercise price. (Answer must be 50 words minimum to get credit.
4. Critique this statement: “My call option is very deep-in-the-money. I don’t see how is can go any higher. I think I should exercise it.” (Answer must be 50 words minimum to get credit.
5. Explain the binomial model and describe the advantages on the binomial model (Answer must be 50 words minimum to get credit.
6. The Black-Scholes-Merton model has 5 important variables that effect the option price. Please describe:
a. Delta (Answer must be 25 words minimum to get credit.
b. Gamma (Answer must be 25 words minimum to get credit.
c. Rho (Answer must be 25 words minimum to get credit.
d. Vega (Answer must be 25 words minimum to get credit.
e. Theta (Answer must be 25 words minimum to get credit.
7. Black-Scholes-Merton model and options prices are extremly sensitive to volatility. Please explain the two approaches for estimating the volatility: (1) historical volatility (Answer must be 25 words minimum to get credit. [Worth 5 points] and (2) implied volatility (Answer must be 25 words minimum to get credit.