This plot gives us a rough idea about the implied

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Unformatted text preview: hown in “Vol”, we have plotted the call option prices and volatility using Excel function. This plot gives us a rough idea about the implied volatility gives If we find the call option price is 20, then vol = 45.0%~47.5% 15-7 Goal Seek for implied vol. (1) As shown in the prior slide, Data Table could not As give us a very precise estimate of the implied volatility volatility Let’s use “Goal Seek” function to help us to find Let’s the precise implied volatility the Go to cell G11, $9.8263 is the call price based Go on volatility 20%. Now, select “Goal Seek” function, let the “set cell” to be G11, let “To value” be 20, and let “By changing cell” to be F11. We find that F11 changes to 46.9% and G11 becomes very close to 20 becomes So, the implied vol. is 46.9% given call price = So, 15-8 20 20 Goal Seek for implied vol. (2) What if the call price drops to 15? Implied vol = 33.65% given call price = 15 Implied What if the call price ups to 25? Implied vol = 60.32% given call price = 25 Implied Our results suggest that the implied volatility Our increases with call option’s prices. increases So, when we observe a stock’s call option So, price going up (given stock price, dividends, and risk-free rate remain the same), we may infer that the market expects the future volatility going up 15-9 Goal Seek for implied vol. (3) What if we have more than one European call What option for one stock? option Although we have one stock volatility, there Although are more-than-one implied volatility estimates based on several European call options (various strike prices and option prices) See “Vol2” tab for an example See We have to assign an initial value (I set 10%) We for the volatility for call options given different strike prices strike We then try to find the market’s expected We volatility based on each option’s market price volatility 15-10 Goal Seek for implied vol. (4) X-axis denotes the strike prices of call X-axis options, and Y-axis denotes the im...
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This document was uploaded on 03/03/2014.

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