When Moving from Valuing an Option on a Non-Dividend Paying

question 2

Multiple Choice

When moving from valuing an option on a non-dividend paying stock to an option on a currency which of the following is true?

• A) The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate in all calculations
• B) The formula for u changes
• C) The risk-free rate be replaced by the excess of the domestic risk-free rate over the foreign risk-free rate for discounting
• D) The risk-free rate be replaced by the excess of the domestic risk-free rate over the foreign risk-free rate when p is calculated

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Definitions:

Population Parameters

Numeric characteristics that describe or summarize features of an entire population, such as mean or standard deviation.

Outliers

Data points that differ significantly from other observations in a data set, possibly indicating a variable error or an unusual event.

Sample Proportion

The ratio of participants or units in a sample exhibiting a particular characteristic to the total sample size, often used in statistical analysis.

Standard Deviation

A statistical measure that quantifies the amount of variation or dispersion of a set of data points, calculated as the square root of the variance.