# Question: Suppose that the parameters in a GARCH 1 1 model are

Suppose that the parameters in a GARCH(1,1) model are = 0.03, = 0.95 and = 0.000002.

(a) What is the long-run average volatility?

(b) If the current volatility is 1.5% per day, what is your estimate of the

volatility in 20, 40, and 60 days?

(c) What volatility should be used to price 20-, 40-, and 60-day options?

(d) Suppose that there is an event that increases the volatility from 1.5% per day to 2% per day. Estimate the effect on the volatility in 20, 40, and 60 days.

(e) Estimate by how much the event increases the volatilities used to price 20-, 40-, and 60-day options.

(a) What is the long-run average volatility?

(b) If the current volatility is 1.5% per day, what is your estimate of the

volatility in 20, 40, and 60 days?

(c) What volatility should be used to price 20-, 40-, and 60-day options?

(d) Suppose that there is an event that increases the volatility from 1.5% per day to 2% per day. Estimate the effect on the volatility in 20, 40, and 60 days.

(e) Estimate by how much the event increases the volatilities used to price 20-, 40-, and 60-day options.

## Answer to relevant Questions

Estimate parameters for the EWMA and GARCH(1,1) model on the euro-USD exchange rate data between July 27, 2005, and July 27, 2010. This data can be found on the author’s website: www-2.rotman.utoronto.ca/∼hull/RMFI/data Suppose that a bank has made a large number loans of a certain type. The one-year probability of default on each loan is 1.2%. The bank uses a Gaussian copula for time to default. It is interested in estimating a “99.97% ...The probability that the loss from a portfolio will be greater than $10 million in one month is estimated to be 5%. (a) What is the one-month 99% VaR assuming the change in value of the portfolio is normally distributed with ...A company has a long position in a two-year bond and a three-year bond as well as a short position in a five-year bond. Each bond has a principal of $100 and pays a 5% coupon annually. Calculate the company’s exposure to ...Explain one way that the Dodd–Frank Act is in conflict with (a) the Basel international regulations (b) the regulations introduced by other national governments.Post your question