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Okay, here my only opinion and it's not the academic answer that you should rely on, just "on-desk experience", but anyway. Answering your question about: Have you ever seen these returns calculated like this? According to CDS. - definitely not. If we are talking about single-name CDS derivative instrument. (not about index one). I double @Dimitri's answer ...


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The skew/smile of long term options is flatter than short term options, the reason for this can be explained in several ways. The Vega of a shorter-dated option is smaller than a longer-dated option. Vega is the dollar value of a 1% change in implied volatility. i.e., 30d ATM option, $65 strike, .31 ivol = VEGA .07 30d 25 delta option,31% ivol = ...


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Jumps are an attempt to solve a math mistake in Modern Portfolio Theory. In the 19502-70s, economists were working on solving the variance-mean tradeoff. Furthermore, they needed to do so with punchcard computing. That radically restricted the set of computable, potential solutions. Both the normal distribution and the log-normal distribution are ...


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