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Question 1 For each of the FIVE (5) statements below, state whether it is TRUE or FALSE (2 marks) and EXPLAIN the reason (3 marks).
Question 1 For each of the FIVE (5) statements below, state whether it is TRUE or FALSE (2 marks) and EXPLAIN the reason (3 marks). 1) In the Black-Scholes-Merton framework, the price of a forward start option with the strike price being a known multiplier of the spot price when the option comes into existence is always the same as the price of the equivalent option that starts immediately. Type answer here 2) A conceptual difference between the Black-Scholes-Merton model and the binomial model is that the former is based on replication whereas the latter is based on risk neutral valuation. Type answer here 3) A company can invest funds for five years at 6% per annum with semi-annual compounding. The five-year swap rate is 6.3% per annum. The floating rate of interest the company can earn is L - 0.3% per annum where L is the benchmark floating rate
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