Question: Compute January 12 2004 implied volatilities using the average of
Compute January 12 2004 implied volatilities using the average of the bid and ask prices for IBM options expiring February 21 (use the Black-Scholes implied volatility function). Compare your answers to those in the previous problem. Why might someone prefer to use implied volatilities based on the average of the bid and ask prices, rather than the bid and ask volatilities individually?
Answer to relevant QuestionsIn this problem you will compute January 12 2004 bid and ask volatilities (using the Black-Scholes implied volatility function) for 1-year IBM options expiring the following January. Note that IBM pays a dividend in March, ...Using the base case parameters, plot the implied volatility curve you obtain for the base case against that for the case where there is a jump to zero, with the same λ. Replicate the GARCH(1,1) estimation in Example 24.2, using daily returns from on IBM from January 1999 to December 2003. Compare your estimates with and without the four largest returns. What are the 1-, 2-, 3-, 4-, and 5-year zero-coupon bond prices implied by the two trees? Using Monte Carlo, simulate the process dr = a(b − r)dt + σ√rdZ, assuming that r = 6%, a = 0.2, b = 0.08, φ = 0 and σ = 0.02. Compute the prices of 1-, 2-, and 3-year zero coupon bonds, and verify that your answers ...
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