Problem With Volatility MMA 707 Analytical Finance I Lecturer: Jan Röman Members ： Bo He Xinyan Lin.

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Presentation transcript:

Problem With Volatility MMA 707 Analytical Finance I Lecturer: Jan Röman Members ： Bo He Xinyan Lin

Introduction In finance, volatility is a measure for variation of price of a financial instrument over time. It is a general measure for traders analyze how risky he has been exposed by holding his financial instruments. Unfortunately, the volatility does not concern the direction of the price changes.

Implied volatility The implied volatility of an asset is an estimate of volatility, or rate of price change, for the asset. It is the volatility of the option implied by current market prices. In mathematical finance, volatility is defined as the annualized standard deviation of daily price changes. Implied volatility can be interpreted as the market expected future volatility.

The same method apply to call option:

Historical Volatility The historical volatility is basically the volatility of a financial instrument over a given time period

Calculation of Historical Volatility T: period of the observation. P: the price in day t t : from 1 to T+1

Implied Volatility and Historical Volatility Historical volatility reflects the price movement of the underlying asset during a past period, that is to say, it looks backward at price actions and measures the degree of change in the price of a security. While the implied volatility it looks forward.

Application

Result ABB Call option:

Microsoft Call option

Microsoft Put option

Index call and put options OMXS30

Thank you !