# Question

Use the same inputs as in the previous problem. Suppose that you observe a bid option price of $50 and an ask price of $50.10.

a. Explain why you cannot compute an implied volatility for the bid price.

b. Compute an implied volatility for the ask price, but be sure to set the initial volatility at 200% or greater. Explain why the implied volatility for the ask price is extremely large.

c. (Optional) Examine the code for the BSCallImpVol function. Explain why changing the starting volatility can affect whether or not you obtain an answer.

d. What can you conclude about difficulties in computing and interpreting implied volatilities for deep in-the-money options?

a. Explain why you cannot compute an implied volatility for the bid price.

b. Compute an implied volatility for the ask price, but be sure to set the initial volatility at 200% or greater. Explain why the implied volatility for the ask price is extremely large.

c. (Optional) Examine the code for the BSCallImpVol function. Explain why changing the starting volatility can affect whether or not you obtain an answer.

d. What can you conclude about difficulties in computing and interpreting implied volatilities for deep in-the-money options?

## Answer to relevant Questions

Use the following inputs to compute the price of a European call option: S = $50, K = $100, r = 0.06, σ = 0.30, T = 0.01, δ = 0. a. Verify that the Black-Scholes price is zero. b. Verify that the vega for this option is ...What are the 1-, 2-, 3-, 4-, and 5-year zero-coupon bond prices implied by the two trees? This problem builds on the previous problem using the same parameters, only valuing a call option instead of a bond. Using Monte Carlo, simulate the Vasicek process for 3 years. For each simulation trial, at the end of 3 ...Verify that the 4-year zero-coupon bond price generated by the tree in Figure 25.5 is $0.6243. What are 95% and 99% 1-, 10-, and 20-dayVaRs for a portfolio that has $4m invested in stock A, $3.5m in stock B, and $2.5m in stock C?Post your question

0