Question: Using the base case parameters plot the implied volatility curve
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.
Answer to relevant QuestionsRepeat Problem 24.16, except let αJ = 0.20, and in part (b) consider expected alternate jump magnitudes of 0.10 and 0.50. The following two problems both use the CEV option pricing formula. Assume in both that S = $100, r = ...Estimate a GARCH(1,1) for the S&P 500 index, using data from January 1999 to December 2003. Verify that the price of the 12% interest rate cap in Figure 25.6 is $3.909. Repeat the previous problem, but set φ = 0.05. Be sure that you simulate the riskneutral process, obtained by including the risk premium in the interest rate process. Verify that the 4-year zero-coupon bond price generated by the tree in Figure 25.5 is $0.6243.
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