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Finance Modeling - Assignment Example

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Later, the black shoe model was used to determine the volatility implied in the variance. Actual values are used in place of other value and then the model is used to calculate the variance…
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Finance Modeling
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Implied Variance for the Black Scholes Model Introduction The variance of security was determine using observation of historic price behaviour. Later, the black shoe model was used to determine the volatility implied in the variance. Actual values are used in place of other value and then the model is used to calculate the variance (Fengler 15)
Discussion
When we examine the Black Scholes model, we see that it would be impossible to manipulate the equation so that V ends up on the left-hand side all by itself. This forces us to use an iterative approach to solve for the volatility. The custom Black Scholes function that we constructed in the previous project makes it easy for us to solve for call prices. Therefore, we can set things up so that we can try different variances until we find the one that gives us the actual (known) call price that is observed in the market (Chris 45)
Table 1
Name
Stock price
Expiry dates for options
Exercise price
Market price
Option1
23
22
3rd April
3rd April
3rd April
Option 2
18
16
3rd April
3rd April
3rd April
Option 3
25
24
3rd April
3rd April
3rd April
Calculations
Use a risk-free rate of 2%. Compute the fraction of years remaining on the option. Read More
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