FRM II

anbu.edu
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FRM II

Postby anbu.edu » Sat Feb 08, 2014 2:43 am

What do you mean by state dependent volatility? It was mentioned that non recombining BT

Source form market risk measurement & mang- Chapter 3 science of term st

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shreyas
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FRM II

Postby shreyas » Mon Feb 17, 2014 8:42 am

State dependent volatility means that volatility is a function of the state space in which you are sitting.
For example in case of options the volatility of the stock price can be a function of the present stock which will make the binomial tree non recombining.

eg. if stock price is 100 i.e lower node in BT then stock price volatility may be 10% whereas if it is 150 i.e upper node then the stock price volatility may be 15% which means that volatility is a function of present stock price i.e state

pradeeppdy
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FRM II

Postby pradeeppdy » Wed Apr 02, 2014 6:06 am

When there are different risk levels of a particular asset , the equilibrium relationship happens at various levels of risk .In this scenario discrete relationship happens and investors get the returns with change in levels of volatility.


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