Problems with real probabilities to price derivatives
What are the main problems with real probabilities to price derivatives?
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Two main problems are there with it.1. You need to be capable to measure real probabilities. 2. You need to decide on a measure of risk aversion or a utility function.
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A stock whose value is now $44.75 is growing on average by 15 percent per annum. Its volatility is 22 percent. The interest rate is 4 percent. You need to value a call option along with a strike of $45, expiring in two months’ time. So, what can you do?
You are trying to save to buy a new $150,000 Ferrari. You have $40,000 today that can be invested at your bank. The bank pays 5.5% annual interest rate on its accounts. How long will it be before you have enough to buy the car?
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Illustrates an example of Poisson Process?
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what happens to company when additional fund is not required?
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