Question 1

a) Discuss how margin account works in futures markets. (6 marks)

b) Explain the relationship between dividend and American call and put options (6 marks)

c) Discuss how the Black-Scholes option pricing formulas can be used in pricing American call options. (12 marks)

d) What is the volatility curve if the left tail is less heavy than the lognormal distribution and the right tail is heavier than the lognormal distribution? (6 marks)

[Total marks: 30]