Financial Risk Manager Part 2
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What key issues is the risk committee of Company ABC addressing in relation to the pricing of deeply out-of-the-money call options on ABC's stock and the USD/GBP exchange rate using the Black-Scholes-Merton model? Additionally, how does employing an implied risk-neutral probability distribution derived from the volatility smile compare to using a lognormal distribution for pricing these two types of options when they have identical maturity and moneyness?
A
The price of the option on ABC stock would be relatively high and the price of the option on USD/GBP FX rate would be relatively low compared to those computed from the lognormal counterparts.
B
The price of the option on ABC stock would be relatively low and the price of the option on USD/GBP FX rate would be relatively high compared to those computed from the lognormal counterparts.
C
The price of the option on ABC stock would be relatively low and the price of the option on USD/GBP FX rate would be relatively low compared to those computed from the lognormal counterparts.
D
The price of the option on ABC stock would be relatively high and the price of the option on USD/GBP FX rate would be relatively high compared to those computed from the lognormal counterparts