Problem

9. (Requires Writing Code) Using the following parameters, price call options for a range...

9. (Requires Writing Code) Using the following parameters, price call options for a range of seven strike prices with the Merton jump model.

S = 100 
K = {70, 80, 90, 100, 110, 120, 130}
T = 0.5 years
rf = 3%
sigma = 0.30
mu = -0.05
gamma = 0.50
lambda = 0.5

Now with the seven option prices (one for each strike price), find out what the implied volatility is in the Black-Scholes model. You will need to write program code to find the implied volatility.

Once you have the seven corresponding implied volatilities, plot them against the strike prices. What shape does your options smile have?

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Solutions For Problems in Chapter 16