Question: Question 1 (a) A company forecasts volatility using EWMA models. If it changes the parameter 2 from 0.95 to 0.85 what will the impact on

Question 1 (a) A company forecasts volatility using EWMA models. If it changes the parameter 2 from 0.95 to 0.85 what will the impact on the forecast be? 6 Marks (b) Write out the equations for the EWMA and GARCH models. How do they differ? 6 Marks (c) If the price of Platinum at the close of trading yesterday (Wednesday) was 300 with an estimated daily volatility of 1.3%, work out the updated volatility estimate for today (Thursday) if the price drops to 298 at the close of trading today (Thursday) using: 1. The EWMA model with lambda = 0.94 2. GARCH (1,1) models with a. w (constant term) 0.000002 b. (arch term) 0.04 c. $(garch term) 0.94 = Closing Price Wednesday 300 Thursday 298 Daily Volatility Estimate 1.3% 7 8 Marks Total 20 Marks

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