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The Contingent Claims Arms Race
Jul 1, 1992
Although the cold war is over, "rocket" scientists are hard at work extending and elaborating fixed income contingent claims models for evaluating embedded options. While option-modeling technology has become very advanced and useful, a body of cant, which can befuddle the unsuspecting practitioner, also surrounds it. In this article, three observations are explored: volatility is the most important model parameter; even bad models can be tuned to give good results for the most simple options, and; good models are good because they work over a wider range of options.