2016-FRR Exam Dumps | A risk manager is considering how to best quantify option price dynamics using mathematical option pricing

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GARP.2016-FRR.v2025-06-21.q161
Question 32

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Question 32/161

A risk manager is considering how to best quantify option price dynamics using mathematical option pricing models. Which of the following variables would most likely serve as an input in these models?
I. Implicit parameter estimate based on observed market prices
II. Estimates of sensitivity of option prices to parameter changes
III. Theoretical option determination based on assumptions

A. I, III

B. II

C. II, III

D. I, II, III

Correct Answer: D

Mathematical option pricing models typically use the following variables as inputs:
* I. Implicit parameter estimate based on observed market prices: These are derived from market data to infer parameters such as volatility.
* II. Estimates of sensitivity of option prices to parameter changes: These include Greeks like Delta, Gamma, Theta, etc., which measure the sensitivity of the option's price to various factors.
* III. Theoretical option determination based on assumptions: This involves theoretical calculations based on models like Black-Scholes, which use assumptions about market behavior and asset dynamics.
References:The inputs and methodologies for option pricing models are well-documented in financial literature and can be referenced in the "How Finance Works" document.

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