Explanation:
All of the propositions support the strategy of buying deep-out-of-the money call and put options on various currencies and waiting.
Proposition I states that the chosen options will be relatively inexpensive, which is a key advantage of this strategy. The lower the cost of the options, the lower the initial investment required, and the higher the potential return on investment.
Proposition II suggests that more of the chosen options will close in the money than predicted by the lognormal model. This means that the actual returns from the options are likely to be higher.
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Q.1711 When it comes to making a decision regarding trading using the Black-Scholes-Merton model, assumptions must be made regarding the distribution of exchange rates. But at the same time, the lognormal assumption is deemed as not a right choice for exchange rates, and it’s advisable to buy deep-out-of-the money call and put options on a variety of different currencies and wait. This suggestion is supported by the following reasons:
I. The chosen options will be relatively inexpensive
II. Many of the chosen options will close in the money than the prediction of lognormal-model
III. On average, the payoffs’ present value will be more than the options’ cost
A
Both I and II
B
Both I and III
C
All of the above
D
None of the above
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