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Problem 5 (10 points: Each question is worth 2 points) Provide brief answers to the following questions A. Explain how an increase in interest rates
Problem 5 (10 points: Each question is worth 2 points) Provide brief answers to the following questions A. Explain how an increase in interest rates affected Bear Stearns adversely. B. What is the difference between Asian options and lookback options? C. What are the two important features that distinguishes the risk-neutral world from the real world? D. What are the possible explanations for the commonly observed volatility smirk in equity options? E. Provide an example of a Bermuda option. Problem 5 (10 points: Each question is worth 2 points) Provide brief answers to the following questions A. Explain how an increase in interest rates affected Bear Stearns adversely. B. What is the difference between Asian options and lookback options? C. What are the two important features that distinguishes the risk-neutral world from the real world? D. What are the possible explanations for the commonly observed volatility smirk in equity options? E. Provide an example of a Bermuda option
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