medium · FRM Part 1
A trader uses GARCH(1,1) to price a 1-year option. If current volatility is 40% and the long-run average is 20%, using EWMA instead of GARCH would likely lead to:
- Exactly the same price.
- Overpricing the option.
- An arbitrage opportunity in the underlying stock.
- Underpricing the option.
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