--%>
Assignment Help - homework help

What is nonlinearity in option pricing model

What is nonlinearity in option pricing model?

E

Expert

Verified

Nonlinearity in an option pricing model implies that the value of a portfolio of contracts is not essentially the same as the sum of its constituent parts values. An option will have a various value depending on what else is within the portfolio with this, and an exotic will have a different value depending on what this is statically hedged along with.

   Related Questions in Corporate Finance

  • Q : Explain Butterfly Spread Strategies

    Butterfly Spread Strategies: In this strategy, there is no limit on the number of options that can be combined to form the butterfly spread. This strategy essentially combines both the bear spread and the bull spread. In this case, options with three

    		•
  • Q : Determine weighting of shares done and

    When computing the WACC, is the weighting of the shares done and the debt with book values of debt and shareholder’s equity or along with market values?

    		•
  • Q : Determine the future value What would

    What would the future value after 5 years of $100 be at 10% compound interest?

    		•
  • Q : Problem on EBIT ABC Corporation stock

    ABC Corporation stock sells at $27 per share and its dividend per share is $1.20. ABC has price-earnings ratio of 16. The company contains $40 million worth of bonds, selling at par, with 8.5% coupon. The EBIT of ABC is of $12 million and its tax rate is 30%. Calculat

    		•
  • Q : Explain Straddle and Strangle Straddle

    Straddle & Strangle: In the case of shorting butterfly spread, it can be seen that the gains are limited. However, there exists another strategy known as straddle which produces unlimited gains. This strategy benefits when the trader expects that

    		•
  • Q : Does the book value of the debt

    Does the book value of the debt all the time coincide with its market value?

    		•
  • Q : Define Strong form market efficiency

    Strong form market efficiency: Strong form market efficiency defines that the price of a security in the market replicates all information—public and also private or within information. Strong form efficiency

    		•
  • Q : Problem on raising new capital AB

    AB Corporation has 3 million shares of common stock selling at $19 each. It also contains $25 million in bonds with coupon rate of 8%, selling at par. AB requires $10 million in new capital that it can raise by selling stock at $18, or bonds at 9% interest. The expect

    		•
  • Q : Historical return on stock market and

    The market risk premium is difference among the historical return upon the stock market and the risk-free rate, for yearly. Why is this negative for some years?

    		•
  • Q : Problem on leasing Johnathan Lewis is

    Johnathan Lewis is looking into the possibility of buying several coin-operated vending machines and put them in local hospitals. Each machine costs $2000, that he will depreciate on a straight-line basis over 8 years. The machine will dispense soft-drink cans at 75 c

    		•