A Wall Street Trading Firm Is Using a Jump-Diffusion Model $- 2 \%$

Multiple Choice

A Wall Street trading firm is using a jump-diffusion model to price their index options. They determine that the arrival rate of jumps in the market is 4 times a year, and that the jumps have a mean size of $- 2 \%$ and standard deviation of 10%. If the implied volatility of the stock index is 40%, what is the diffusion parameter ( $\sigma$ ) that they should use in their model?

A) 0.35
B) 0.40
C) 0.45
D) 0.50