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1 vote

Jamshidian's formulation of Black Derman Toy

It suffices to prove $\mathbb{P}(r(t) \ge U(t))=\frac{1}{2}$ which is true because $$\begin{align} \mathbb{P}(r(t) \ge U(t))&=\mathbb{P}(\exp{\sigma(t)W(t)} \ge 1) = \mathbb{P}(W(t) \ge 0) = \frac{...
NN2's user avatar
  • 1,033
1 vote

How to fix my Monte Carlo simulation?

The problem is that the Heston process describes variance as a mean-reverting process (towards theta). Therefore, if you specify variance as higher than 0.0398 (the theta level it reverts to), the ...
KaiSqDist's user avatar
  • 1,454

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