Derive an approximate expression (to O(T) ) for the implied ATM volatility on a stock entirely driven

Question:

Derive an approximate expression (to O(√T) ) for the implied ATM volatility on a stock entirely driven by jump to zero (i.e. zero diffusion vol). Discuss how one might exploit an implied volatility quote below this level.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer: