For this problem, use the implied volatilities for the options expiring in January 2005, computed in the preceding problem. Compare the implied volatilities for calls and puts. Where is the difference largest? Why does this occur?
Answer to relevant QuestionsSuppose S = $100, r = 8%, σ = 30%, T = 1, and δ = 0. Use the Black-Scholes formula to generate call and put prices with the strikes ranging from $40 to $250, with increments of $5. Compute the implied volatility from these ...Using the CEV option pricing model, set β = 1and generate option prices for strikes from 60 to 140, in increments of 5, for times to maturity of 0.25, 0.5, 1.0, and 2.0. Plot the resulting implied volatilities. (This should ...Use the same inputs as in the previous problem. Suppose that you observe a bid option price of $50 and an ask price of $50.10. a. Explain why you cannot compute an implied volatility for the bid price. b. Compute an implied ...For years 2–5, compute the following: a. The forward interest rate, rf , for a forward rate agreement that settles at the time borrowing is repaid. That is, if you borrow at t − 1 at the 1-year rate ˜r, and repay the ...Suppose the yield curve is flat at 8%. Consider 3- and 6-year zero-coupon bonds.You buy one 3-year bond and sell an appropriate quantity of the 6-year bond to durationhedge the position. Any additional investment is in ...
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