When constructing a theoretical model for pricing a derivative, if the theoretical model is rejected by historical

Question:

When constructing a theoretical model for pricing a derivative, if the theoretical model is rejected by historical data, can one still use the model to price derivatives? Explain your answer using the BSM as an example.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For book-img-for-question

An Introduction to Derivative Securities Financial Markets and Risk Management

ISBN: 978-0393913071

1st edition

Authors: Robert A. Jarrow, Arkadev Chatterjee

See More Books

Question Posted: Dec 02, 2015 03:54 AM

See More Questions

Answer the following questions: a. Suppose Asset A has an expected return of 10% and a standard deviation of 20%. Asset B has an expected return of 16% and a standard deviation of 40%. If the...
a. Suppose Asset A has an expected return of 10% and a standard deviation of 20%. Asset B has an expected return of 16% and a standard deviation of 40%. If the correlation between A and B is 0.35,...
Why has Amazon succeeded online when so many other companies have failed? From a theoretical standpoint, what is Amazon's pricing model? Why is this so effective? How does this compare to their...
Explain why each of the following statements about profit-maximizing competitive firms is incorrect. Restate each one correctly. a. A competitive firm will produce output up to the point where price...
A toy manufacturer receives large shipments of electronic components that will be used in the dolls that it makes. It is too expensive to test every component to see whether it functions properly, so...
The following data give the results of a sample survey. The letters A, B, and C represent the three categories. a. Prepare a frequency distribution table. b. Calculate the relative frequencies and...
Discuss in what ways the rights and responsibilities of patients and employees are alike.
Horizon Books is a bookstore in downtown Philadelphia. It carries an inventory of approximately 5,000 books. Customers come in and browse the shelves, select their books, and take them to the...
Describe the shape of the distribution for the histograms below: Frequency 10 20 30 Histogram of Protein 2 Protein 6 Mean = 2.53 Std. Dev. 1.089 N = 76
The speed control of a high-speed train is represented by the system shown in Figure AP5.4 [17]. Determine the equation for steady-state error for K for a unit step input r(t). Consider the three...
Briefly describe the two types of models that we introduced, highlighting their strengths and weaknesses.
Complete the following table using the following information: Column 1 reports six strike prices $150 to $175 at $5 intervals. Column 2 is for the closing stock price on YBM, $160. Column 3 is for...
Express the traction boundary condition (12.3.8) in terms of displacement and temperature for the plane stress problem. Equation 12.3.8 T = Oxnx + xyny = (Tr), T" = Txynx + ayny
On 1 May 2013, F. Marr Ltd, 2 Frank Lane, Manchester, sold the following goods on credit to M. Low & Son, Byron Golf Club, Cheesham, Notts: (a) Prepare the sales invoice to be sent to M. Low & Son....
If a society has a fi xed budget that it can devote to all interventions, formulate a prioritizing rule that would save the greatest number of years of life for a given budget.
B. Charles has a basic working week of 40 hours, paid at the rate of 8 per hour. For hours worked in excess of this he is paid 11 /2 times basic rate. In the week to 12 March 2012 he worked 45 hours....
We know that correlations never explain; it is our theories that provide explanations. Re-examine Table 5.4 and draft theories to explain why WIC has a larger contribution than Organized Family...
Assume that a monopoly fi rm has a linear demand curve and a constant marginal cost curve. Graph this fi rms optimal output choice before and after a per-unit excise tax is placed on the output. Does...
Evaluate the following integrals. dx (x2 36)3/2 9 x>6
The following processes constitute the air-standard Diesel cycle: 12: isentropic compression,23: constant-volume energy addition (T and P increase),34: constant-pressure energy addition (v...
What are structured notes and stripped securities? What unusual features do they contain?
How is the expected yield on most bonds determined?
If a government bond is expected to mature in two years and has a current price of $950, what is the bond's YTM if it has a par value of $1,000 and a promised coupon rate of 10 percent? Suppose this...
Suppose a, b, and c are int variables and a = 5 and b = 6. What value is assigned to each variable after each statement executes? If a variable is undefined at a particular statement, report UND...
In terms of hydrogen ion concentration, how much more acidic is a solution with a pH of 4.0 than a solution with a pH of 5.5? Round your answer to the nearest tenth. Show Recall that pH, p(x), is...
The following was submitted under the original assignment of "write small program that uses dynamic binding".. now what is requested is to suggest another way to take advantage of the dynamic biding...

When constructing a theoretical model for pricing a derivative, if the theoretical model is rejected by historical

Question:

Step by Step Answer:

Yes calibration will transform the theoretical model into a statistical model The ...View the full answer

An Introduction to Derivative Securities Financial Markets and Risk Management

Students also viewed these Banking questions