Question No. 5
The highlighted nodes at the right-most corner of the binomial tree diagram shows a log normal distribution. If we plot returns and their probabilities on a graph, it would be clear that it is following a log normal distribution. (cambridgespark, 2016)
(b)Â Â Â Â Â Â The options in the questions are American style options as it is mentioned in the question that the values in red are results of an early exercise of the options. The main difference between the European and American options are that the American options can be exercised at all times, and European options can only be exercised at a certain time; this suggests that the options are American Options.
At the initial node, the value of delta is 80.
Question No. 6
Interest Rate Cap
Interest rate cap is a series of interest call options of European type, also known as caplets, with an interest rate. Each interest rate expires when the rate of the floating loan is reset. Additionally, on the date of payment of each interest rate, the holder of the interest rate cap makes their decision regarding exercising the option or not. It is used for hedging against floating risk rate.
The seller compensates the buyer of the interest rate cap if the rate surpasses the rate specified in the contract.
Interest Rate Floor
Interest rate floor is a series of interest put options of European type. The difference is that, here the seller compensates the buyer of the interest rate floorif the rate falls down below the rate specified in the contract. (Peter Tufano, 1994)
An investor should buy an interest rate cap when the market rate of the underlying stock or asset is expected to increase.
It is a kind of an options collar strategy in which the cost of money in one half counterbalances the cost of the second half of the strategy. Zero-cost collar strategy is used by investors when a stock realizes huge gains after a long position.
It can be more attractive for aninvestor to buy in a bear market as a zero-cost collar not only locks the maximum loss but also the maximum gain. It can be used by investors to protect unrealized gains. Apart from this, it also benefits the investor for the capturing of dividends. (Marie, 2012)
Question No. 7
The regulations developed for any organization are based upon its type of industry and government regulations as well. But generally, there are a number of areas that most of the organizations need to cover and develop policies and procedures for. Some of these are listed below.
- A screening policy before hiring any volunteers, interns or employees.
- Policies regarding the growth of the business.
- Policies and procedures regarding the contingency plans.
- Maintenance of fixed assets.
- Inspection of area.
- Policies for training of employees.
- Policies regarding the reporting of any event.
- Code and conduct for work ethics.
- Code and conduct for privacy of individuals and documents of the organization.
- Policies regarding the emergency plans…………………..
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