Question: Explain the Black-Scholes formula (a) Explain the Black-Scholes formula, C = Se-tb(d) Ke-rt (d2), by reference to Margrabe's option to exchange one asset for another.

Explain the Black-Scholes formula

Explain the Black-Scholes formula (a) Explain the Black-Scholes formula, C = Se-tb(d)

(a) Explain the Black-Scholes formula, C = Se-tb(d) Ke-rt (d2), by reference to Margrabe's option to exchange one asset for another. Give explicit values of di, d2 and interpret the expressions (di) and (d) as risk-neutral probabilities of a certain event. Justify your answers thor- oughly. [8]

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