Implied volatilities are frequently used to quote the prices of options. The implied volatility of a European option on a particular asset as a function of strike price and time to maturity is known as the asset's volatility surface. Traders monitor movements in volatility surfaces closely. In...

This paper uses a real options approach to analyse the exercise of the default option embedded in mortgages. In particular, it examines a subprime household who borrows at a premium, but hopes to refinance at prime rates if their house appreciates. We show how these optimal default decisions can...