Question

The Option Theortic model takes into account the following:

Multiple Choice

a) certainty

b) expectation and certainity

c) expectation, uncertainty and path-dependency

d) path-dependency and certainty

Answer 1

The Option Theoretic model takes into account the following: expectation, uncertainty and path-dependency

Therefore correct answer is option: c) expectation, uncertainty and path-dependency

The Option Theoretic model used a valuation approach to know the expected default frequency and recovery rates of a firm. The source of uncertainty comes from the default risk and interest rate risk. The future is uncertain and the present state depends on history which is known as path dependency.