Special Report on
Extending the Merton Model
Extending the Merton Model - Trends
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Recently, we added the Bates stochastic volatility jump-diffusion model to the Numerix CrossAsset model library. This is the market standard model for pricing exotic options that depend heavily on the forward skew, such as cliquets and other forward-starting trades. For these types of options, the classic Black-Scholes model  is inadequate, because it implies constant volatility. The Heston model  extended the Black-Scholes model with a stochastic volatility process, providing close agreement with the implied volatility surface and realistic dynamics for the smile. However, no stochastic volatility model—including the ...
Most end-users of options want answers to a handful of key questions about an option position: how much is the premium? Is the structure the best way to hedge a position or to take a view on a market? What are the tax, legal and regulatory implications of the trade? However, anyone trading options, anyone who has to mark option positions to market, anyone looking to close out an option position before maturity, anyone for whom the ongoing efficiency of a hedge is important, anyone who has bought a security with embedded optionality in fact just about any user of options is exposed to the ... Read More
SURVEY RESULTS FOR
EXTENDING THE MERTON MODEL
Expected default frequency (EDF, PD) with Merton Model
How d2 in Black-Scholes becomes PD in Merton model
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