Finance Modeling - Assignment Example

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)DiscussionWhen 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 1Name Stock priceExpiry dates for optionsExercise price Market priceOption123223rd April 3rd April3rd AprilOption 218163rd April3rd April3rd AprilOption 325243rd April3rd April3rd April Calculations Use a risk-free rate of 2%.

Compute the fraction of years remaining on the option.