How are you able to measure real probabilities
How are you able to measure real probabilities?
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In classical stochastic differential equation models it implies knowing the real drift rate, frequently denoted with µ for equities. It can be very hard, very harder than measuring volatility. Is this even possible to say whether we are in bear market or a bull? Frequently not! And you require to project forward, again still harder, and harder than also forecasting volatility.
Is volatility constant?
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Explain some examples of mutually exclusive projects.
Would there be positive interest rates on bonds in a world with absolutely no risk (no default risk, maturity risk, and so on)? Why would a lender demand and a borrower be willing to pay, a positive interest rate in such a no risk world?
Does LMM stand for? Explain.
Assume that the treasurer of IBM contains an extra cash reserve of $1,000,000 to invest for six months. The six-month interest rate is 8% per annum in the U.S. and 6% per annum in Germany. Now, the spot exchange rate is DM1.60 per dollar and the six-month forw
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Explain the first way of calibration if we can’t measure that parameter.
Explain econometric models.
What are the main problems with real probabilities to price derivatives?
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