It is said that :
A typical distribution is a regime-switching volatility model: the regime (state) switches from low to high volatility, but is never in between. A distribution is “regime switching” if it changes from high to low volatility.
Further, following are the assumptions of...
Reference AIM: Calculate an arbitrage payoff and describe how arbitrage opportunities are ephemeral.
1. Cash and carry: Short forward +Borrow cash to Buy spot commodity
2. Reverse cash and carry: Long forward +Short spot commodity and Lend/invest cash proceeds
For the point number 1...