medium · Quantitative Finance derivatives
If a market desk calibrates a Heston model and finds that the Feller condition 2κθ ≥ ξ² is violated, what is the most significant practical consequence for their numerical implementation?
- The correlation ρ between the asset and variance must be set to zero.
- The volatility smile becomes perfectly flat across all strikes.
- Naive Euler discretization schemes may produce negative variances.
- The model becomes mathematically undefined and pricing integrals diverge.
Sign up free to see the explanation and track your rank →
More Quantitative Finance derivatives practice
- If the underlying stock price S moves by +$2.00 over a very short interval, what is the es
- If the risk-neutral probability of an up move is p = 0.6 and the risk-free rate is zero, w
- When pricing a 'Digital' (or Binary) call option near expiry with the spot price very clos
- In the context of the Black-Scholes PDE, the Greek 'Theta' (Theta) measures the sensitivit
- When calibrating a Heston stochastic volatility model, a pra… — Does this calibration sati
- Based on put-call parity, what is the arbitrage-free relationship?
- Given a continuously compounded risk-free rate of 5%, what is the price of the correspondi
- If the risk-free growth factor is e^rT = 1.02, what is the risk-neutral probability p^* of