NUMERICAL AND SIMULATION TECHNIQUES IN
FINANCE
PROJECT I
Edward D. Weinberger, Ph.D., F.R.M
Adjunct Assoc. Professor
Dept. of Finance and Risk Engineering
Code and debug a VBA function that computes the implied volatility of an American
equity put option that does not pay dividends. Because there is no analytical formula for
this calculation, you must use one of the numerical root finding method such as one of
those presented in an earlier class.
You could decide to use the bisection method, but then you have to find an upper and
lower bound for the volatility.
An obvious lower bound on the volatility is that it has to
be greater than zero.
A notsoobvious upper bound on the volatility of an American
option is that it has to be smaller than the volatility of an otherwise identical European
option selling at the same price (Why?).
The more adventurous (and significantly faster!) way to compute implied volatility is to
use the secant method, but then you have to find the two initial points.
The two points
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 Fall '09
 Weinberger,Edward
 Volatility, Strike price, Rootfinding algorithm

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