Consider Pricing an Exchange Option on Two Stocks

question 16

Multiple Choice

Consider pricing an exchange option on two stocks.Assume the usual lognormal returns distributions on the stock prices as in Magrabe's formula.Which of the following input variables does NOT affect the probability of the option being in-the-money at maturity?

• A)The volatility of the assets' returns.
• B)The risk-free rate.
• C)The correlation between the two assets' returns.
• D)The time to maturity of the option.

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Definitions:

Jeannette Rankin

The first woman ever elected to the United States Congress, serving as a Representative from Montana and a lifelong advocate for peace and women's rights.

Woman

An adult female human being.

Congress

is the legislative branch of the United States federal government, composed of two houses: the Senate and the House of Representatives.

Peace Ship

Henry Ford's 1915 initiative to send a ship to Europe carrying American activists in an effort to negotiate an end to World War I; it was met with skepticism and did not achieve its goal.