Question

Identify or define each of the following terms: An appropriate strategy when you expect large price...

Identify or define each of the following terms:

An appropriate strategy when you expect large price movement but not sure which direction prices will go=?  

What model should be used for an option on an underlying asset that pays a continuous stream of dividends (such as a stock index)

Employee stock options

Intrinsic value of put=? (give a formula)

Gamma

Heating degree days

Homework Answers

Answer #1

Straddle - It is an option strategy involves buying call and put with same exercise price and expiration.

Black-Scholes-Merton model.

Intrinsic value of put = Max(0, (X-S))

X - options strike price

S - Price of the underlying at expiration

Gamma is the second order measure of option. it measures the change is delta of option to change in the value of the underlying.

The option contracts is available on heating degree days (HDD) and cooling degree days (CDD) options. For each degree of average temperature below 65° F is said to be "one heating degree day.

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