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Question 2 ert- Consider a European call on a stock with a current price of 80 that will move up to 84 or down to
Question 2 ert- Consider a European call on a stock with a current price of 80 that will move up to 84 or down to 76 at the end of 2mths. The call has a strike of 79 and expires in 2mths. You can assume the risk-free rate of interest is 1.25% per annum. Recalling that p (the probability of an upward movement) can be calculated: p= Where, r is the risk-free rate of interest Tis the time to expiration u is the upward multiplier d is the downward multiplier ud (a) Complete the entries in the tree to determine the price of the call option at time 0. Cu us Co So ds (10 marks) (6) Identify and explain the two forms of liquidity risk. Describe how these risks materialised in the 2007-2009 Global Financial Crisis. Discuss the measures introduced through Basel III and proposed under FRTB to address liquidity risk. (15 marks) Question 2 ert- Consider a European call on a stock with a current price of 80 that will move up to 84 or down to 76 at the end of 2mths. The call has a strike of 79 and expires in 2mths. You can assume the risk-free rate of interest is 1.25% per annum. Recalling that p (the probability of an upward movement) can be calculated: p= Where, r is the risk-free rate of interest Tis the time to expiration u is the upward multiplier d is the downward multiplier ud (a) Complete the entries in the tree to determine the price of the call option at time 0. Cu us Co So ds (10 marks) (6) Identify and explain the two forms of liquidity risk. Describe how these risks materialised in the 2007-2009 Global Financial Crisis. Discuss the measures introduced through Basel III and proposed under FRTB to address liquidity risk. (15 marks)
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