Reference no: EM132139651

Critical Thinking Assignment -

Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission.

Option 1: Delta and Risk-Neutral Pricing

Please respond to the following questions while elaborating on your insight and providing external support:

1. Explain the concept of the delta of an option.

2. Give an example of a derivative where the delta may be either positive or negative for different ranges of the stock price. Please explain in detail.

3. Provide an understanding if risk-neutral pricing including how it works and how it can be used.

Complete your 3- to 4-page response. Your response should be formatted according toAPA Requirements, with at least two external sources properly cited.

Option 2: Binomial Option Pricing

Please respond to the following questions while elaborating on your insight and providing external support:

1. Holding all else constant, if dividends increase, does the difference between American calls and puts increase or decrease? Why? What about the difference between European calls and puts?

2. Explain in a heuristic manner why option replication on a binomial tree is a "dynamic" strategy. Expand your thoughts by providing external support that helps to provide further insight into the use of binomial trees.

Complete your 3- to 4-page response. Your response should be formatted according toAPA Requirements, with at least two external sources properly cited.