Explain how real options are similar to, but different from, ordinary options.

Avoid plagiarism , References style APA

Requirements: cover all questions

College of Administrative and Financial Sciences

Assignment-1

FIN 405 – Financial Derivatives

Due Date: 07/10/2023 (End of Week-6) @ 23:59

For Instructor’s Use only

General Instructions – PLEASE READ THEM CAREFULLY

The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.

Assignments submitted through email will not be accepted.

Students are advised to make their work clear and well presented; marks may be reduced for poor presentation. This includes filling your information on the cover page.

Students must mention question number clearly in their answer.

Late submission will NOT be accepted.

Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.

All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).

Submissions without this cover page will NOT be accepted.

Assignment Questions: (Marks- 10)

Read the above case study and answer the following Questions:

Explain how real options are similar to, but different from, ordinary options. (250-300 words) 2.5 Marks

Explain why an option’s time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep- in -or out- of -the money. (250-300 words) 2.5 Marks

Stock currently priced at $100. One period later it can go up to $120, an increase of 20 percent, or down to $90, a decrease of 10 percent. Assume a call option with an exercise price of $100. The risk- free rate is 8 percent. Calculate the Theoretical fair value of the call. (5 Marks)

Answers:

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