Investigate how the probability of loss in Example 2.8 varies as a function of volatility. Make a graph of loss vs. volatility.

 

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Example 2.8. Using the parameters as in Fig. 2.2: So = 100, drift p = 0.06, volatility o = 0.4, and T = 1 year and taking x = So in (2.21), we get d= log (100) – log (100) — (0.06 – 20.4²)1 0.4√1 = 0.05. For this argument a cumulative normal table puts the loss probability at 52%.