Chapter 7, Ex 7

This forum is to discuss the book "the concepts and practice of mathematical finance" by Mark Joshi.

Chapter 7, Ex 7

Postby pariski » Sat Jun 20, 2015 8:00 pm

I do not know how to solve the question 7 of chapter 7:
"Suppose two smiles have the same implied vol at 100, One smile is downwards sloping and the other one is upwards sloping. How will the prices of digital call struck at 100 compare?"
The answer says "the price of the digital call with downwards sloping smile will be worth more"
But I could figure out why, and how is the sloping of smile connected to the value of digital call?
Thank you very much.
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Re: Chapter 7, Ex 7

Postby mj » Sat Jul 04, 2015 10:57 am

the key to this one is to use the expression after (7.35)
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