Black Scholes

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Black Scholes

Postby suresh.wadhwani2009 » Tue Apr 24, 2012 12:06 pm

pls explain:

The Black-Scholes yield volatility of an at-the-money 2 into 3-year European swaption struck at 7% is 15%. The swap payment frequency is semi-annual and the yield curve is flat. What is the volatility of an at-the-money swaption, identical in all respects, expect that the payment frequency is quarterly
a. 0.15
b. Somewhat higher than 15%
c. Somewhat lower than 15%
d. 0.22

M not only looking for solution but for the concept behind the question

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Black Scholes

Postby suresh.wadhwani2009 » Tue Apr 24, 2012 9:53 pm

As asked by you, solution by pristine is:

The answer is: 0.15.

The yield curve is flat and Black-Scholes model. Volatilities are equal.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Black Scholes

Postby content.pristine » Thu Apr 26, 2012 12:30 pm

Hi Suresh,

This question is out of your course. Please ignore it. You guys just have the definition of a swaption, not its black scholes valuation. Don't worry, this type of question wont come in your exam..

8-)

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Black Scholes

Postby suresh.wadhwani2009 » Thu Apr 26, 2012 9:48 pm

Ok.. thanks bdw:)


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