A Wall Street Trading Firm Is Using a Jump-Diffusion Model $- 2 \%$

question 26

Multiple Choice

A Wall Street trading firm is using a jump-diffusion model to price their index options. They determine that the arrival rate of jumps in the market is 4 times a year, and that the jumps have a mean size of $- 2 \%$ and standard deviation of 10%. If the implied volatility of the stock index is 40%, what is the diffusion parameter ( $\sigma$ ) that they should use in their model?

• A) 0.35
• B) 0.40
• C) 0.45
• D) 0.50

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Definitions:

Purchase Price

The amount of money paid to acquire a product or service.

Consolidated Statements

Financial statements that aggregate the financial information of a parent company and its subsidiaries into one comprehensive financial report.

Accrued Interest

Interest that has been incurred but not yet paid.

Interest Dates

The specific dates on which interest payments are made or interest rates are applied to financial instruments or loans.