Explain the second way of calibration
Explain the second way of calibration if we can’t measure that parameter.
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Another method is to assume, efficiently, that there is information in the market prices of traded instruments. Here in example we ask what volatility we should put in a formula to find the ‘correct’ price of $19. We then utilize that number to price other instruments. There In that case we have calibrated our model to an instantaneous snapshot of the market on one moment in time, quite than to any information by the past.
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