Briefly Explain How the Option Pricing Model Can Be Used

question 20

Essay

Briefly explain how the Option pricing model can be used for pricing risky debt?

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Definitions:

Limit-Pricing Strategy

A pricing strategy used by monopolies or dominant firms to set prices low enough to deter entry by potential competitors.

Oligopolists

Firms operating in an oligopoly, a market structure characterized by a few dominant players, which can influence prices and market practices.

Marginal Cost

The additional financial burden incurred when one more unit of a good or service is produced.

Positive-Sum Game

In game theory, a game in which the gains (+) and losses (−) add up to more than zero; one party’s gains exceed the other party’s losses. A strategic interaction (game) between two or more parties (players) in which the winners’ gains exceed the losers’ losses so that the gains and losses sum to something positive.