Financial Risk Manager Part 2
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Mary assigns to John a long position in an at-the-money (ATM) call option with a one-year term and a strike price of $100.00. The current stock price is $100.00 with volatility of 60.0%. The risk-free rate is 3.0% with continuous compounding. N(d₁) = 0.64 and N(d₂) = 0.40. The present-valued expected positive exposure (EPE) to the counterparty, who holds the short option position, is $23.00 with a probability of counterparty default of 5.0% and loss given default (LGD) of 75.0%.
Which is nearest to John's payment for the long option position, if his cost includes a credit valuation adjustment (CVA)?
Mary assigns to John a long position in an at-the-money (ATM) call option with a one-year term and a strike price of $100.00. The current stock price is $100.00 with volatility of 60.0%. The risk-free rate is 3.0% with continuous compounding. N(d₁) = 0.64 and N(d₂) = 0.40. The present-valued expected positive exposure (EPE) to the counterparty, who holds the short option position, is $23.00 with a probability of counterparty default of 5.0% and loss given default (LGD) of 75.0%.
Which is nearest to John's payment for the long option position, if his cost includes a credit valuation adjustment (CVA)?
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