Briefly answer (a) As option trader of leading investment bank, you constantly monitor the relationship between implied volatility and strike prices for option on the stock of Gold mining company. Just before the end of trading day you are observing the shape known as inverse volatility smile. How do you interpret the graph? What can you say about the general relationship between moneyness of options available on the stock of particular Gold mining company and the level of implied volatility? (2 marks) (b) You were asked for opinion on the valuation technique applied by one of junior colleagues. He has applied a Monte Carlo technique for valuation of Asian option on non-dividend paying stock currently trading at $500. The time to expiration of the option is 14 months. The stock price paths are simulated by the process given as a ds. = pdt + odw, where = 0.049 and a = 1.75, W. is a Brownian motion, and So = 490. Discuss your major concerns related to such an approach for option valuation. (2 marks) Asian Options is instrument provides a payoff based on the average asset price during the life of an option. For instance, the payoff of an Asian call can be described as max(0, Average(S) - X). Briefly answer (a) As option trader of leading investment bank, you constantly monitor the relationship between implied volatility and strike prices for option on the stock of Gold mining company. Just before the end of trading day you are observing the shape known as inverse volatility smile. How do you interpret the graph? What can you say about the general relationship between moneyness of options available on the stock of particular Gold mining company and the level of implied volatility? (2 marks) (b) You were asked for opinion on the valuation technique applied by one of junior colleagues. He has applied a Monte Carlo technique for valuation of Asian option on non-dividend paying stock currently trading at $500. The time to expiration of the option is 14 months. The stock price paths are simulated by the process given as a ds. = pdt + odw, where = 0.049 and a = 1.75, W. is a Brownian motion, and So = 490. Discuss your major concerns related to such an approach for option valuation. (2 marks) Asian Options is instrument provides a payoff based on the average asset price during the life of an option. For instance, the payoff of an Asian call can be described as max(0, Average(S) - X)