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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