# Question: Using the Merton jump formula generate an implied volatility plot

Using the Merton jump formula, generate an implied volatility plot for K =

50, 55, . . . 150.

a. How is the implied volatility plot affected by changing Î±J toâˆ’0.40 orâˆ’0.10?

b. How is the implied volatility plot affected by changing Î» to 0.01 or 0.05?

c. How is the implied volatility plot affected by changing ÏƒJ to 0.10 or 0.50?

50, 55, . . . 150.

a. How is the implied volatility plot affected by changing Î±J toâˆ’0.40 orâˆ’0.10?

b. How is the implied volatility plot affected by changing Î» to 0.01 or 0.05?

c. How is the implied volatility plot affected by changing ÏƒJ to 0.10 or 0.50?

## Answer to relevant Questions

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 Î». For the period 1999-2004, using daily data, compute the following: a. An EWMA estimate, with b = 0.95, of IBM's volatility using all data. b. An EWMA estimate, with b = 0.95, of IBM's volatility, at each date using only the ...a. What is the 1-year bond forward price in year 1? b. What is the price of a call option that expires in 1 year, giving you the right to pay $0.9009 to buy a bond expiring in 1 year? c. What is the price of an otherwise ...Using Monte Carlo, simulate the process dr = a(b âˆ’ r)dt + ÏƒdZ, assuming that r = 6%, a = 0.2, b = 0.08, Ï† = 0, and Ïƒ = 0.02. Compute the prices of 1-, 2-, and 3-year zero-coupon bonds, and verify that your answers match ...Construct a four-period, three-step (eight terminal node) binomial interest rate tree where the initial interest rate is 10% and rates can move up or down by 2%; model your tree after that in Figure 25.3. Compute prices and ...Post your question