20.5 Jump diffusion model (page 457) Merton produced a pricing formula when the stock price follows a diffusion process overlaid with random jumps ds s=(u-nk)dt+odz +dp Ap is the random jump k is the expected size of the jump n dt is the probability that a jump occurs in the next interval of length dt Options, Futures, and other Derivatives, 5th edition 2002 by John C. HullOptions, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 20.5 Jump Diffusion Model (page 457) • Merton produced a pricing formula when the stock price follows a diffusion process overlaid with random jumps • dp is the random jump • k is the expected size of the jump • l dt is the probability that a jump occurs in the next interval of length dt dS / S = ( − lk)dt + dz + dp