hard · Quantitative Finance Numerical Methods & Optimization

A quant calibrates a single volatility parameter θ by minimizing the sum-of-squared pricing error E(θ) via Newton's method for optimization, which uses both the first and second derivatives of the loss. At the current guess θ_0=0.22, E'(θ_0)=0.048 and E''(θ_0)=0.320.

What is the updated parameter estimate θ_1 after one Newton step?

  1. 0.1720
  2. -6.4467
  3. 0.3700
  4. 0.0700

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