A futures price is currently $40. The risk-free interest rate is 5%. Some news is expected tomorrow
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A futures price is currently $40. The risk-free interest rate is 5%. Some news is expected tomorrow that will cause the volatility over the next 3 months to be either 10% or 30%. There is a 60% chance of the first outcome and a 40% chance of the second outcome. Use the DerivaGem software (available on the author's website) to calculate a volatility smile for 3-month options.
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