a) To evaluate the Black-Scholes formula, options traders must enter their estimate about the volatility of the underlying asset. Since volatility is the only unknown variable in the Black-Scholes equation, we can use the observed price of the option to extract what volatility estimate option traders use as an input. Empirically, when we look at options written on the same underlying asset, we find that these estimates are not the same for all options contracts.

i)Why do you think this is the case?

ii)What are the implications for the Black-Scholes model?