GARP Updated 2016-FRR Exam Questions and Answers by mina

Asian options are a type of derivative that have a payoff based on the average price of the underlying asset over a certain period or on specific dates. This averaging mechanism makes them particularly useful for companies with recurring foreign currency demands, as it helps smooth out volatility and provides a more stable hedge against currency fluctuations. Given the large energy company's need for an option that fits the description of averaging prices over specific dates or within a pricing window, Asian options are the most suitable choice.

According to the largest global poll of foreign exchange market participants, Deutsche Bank has been identified as the most active participant in the global foreign exchange market. This status is typically attributed to their extensive trading operations and significant market influence.

Impact of Lowering Spread: By lowering the spread on lower credit quality borrowers, the bank can achieve aggressive courting of new business, rapid growth, and higher losses in case of default due to the increased risk.

Exception: Lowering the spread will not lead to a lower probability of default. On the contrary, it typically attracts higher-risk borrowers, increasing the likelihood of default.

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​​.