3) Consider an option on a stock index that trades actively. If the instrument's current bid and offer are 85.90 and 86 respectively, what is your best estimate of its current value? Explain [5 marks] b) Describe in few lines how the Black-Scholes-Merton model is used in practise when pricing for example a European call option on a non-dividend paying asset with time to maturity different from the call options that currently trade in the market. What is the main difference between models for nonstandard products and models for standard products? [20 marks] c) Given the following information: Gamma Delta 0.3 0 Security A Security B Portfolio -0.2 0.6 90,000 -600 c.1) Interpret the delta and gamma of the asset A in terms of an investors gains and losses in response to changes in asset prices [10 marks) c.2) Identity a position that makes the portfolio delta neutral [10 marks) 6.3) Identify a position in securities' A and B that make the portfolio both delta and gamma neutral [25 marks] a) For each of the below concepts, briefly describe what they are and how they help to reduce credit risk. 4.1) Netting [10 marks) 4.2) Collateralization [10 marks) 4.3) Downgrade triggers [10 marks] 3) Consider an option on a stock index that trades actively. If the instrument's current bid and offer are 85.90 and 86 respectively, what is your best estimate of its current value? Explain [5 marks] b) Describe in few lines how the Black-Scholes-Merton model is used in practise when pricing for example a European call option on a non-dividend paying asset with time to maturity different from the call options that currently trade in the market. What is the main difference between models for nonstandard products and models for standard products? [20 marks] c) Given the following information: Gamma Delta 0.3 0 Security A Security B Portfolio -0.2 0.6 90,000 -600 c.1) Interpret the delta and gamma of the asset A in terms of an investors gains and losses in response to changes in asset prices [10 marks) c.2) Identity a position that makes the portfolio delta neutral [10 marks) 6.3) Identify a position in securities' A and B that make the portfolio both delta and gamma neutral [25 marks] a) For each of the below concepts, briefly describe what they are and how they help to reduce credit risk. 4.1) Netting [10 marks) 4.2) Collateralization [10 marks) 4.3) Downgrade triggers [10 marks]