Dowling, Sean, & Jayaram Muthuswamy (2005) "The Implied Volatility
of Australian Index Options", Review of Futures Markets 14 (1).
Finally, in the section "Hedging Under Volatility Risks," we compute a risk minimization hedging when at-the-money implied volatility
follows an Ornstein-Uhlenbeck process and compare its hedging effectiveness with that of using the underlying under both instantaneous and implied volatility
This volatility index is produced using eight S&P 100 index puts and calls, and allows for market microstructure frictions such as bid-ask spreads, the American features of the option contracts, and discrete cash dividends, measuring the implied volatility
on a synthetic at-the-money one month maturity option contract.
Given that there exists a clear-cut relationship between the implied volatility
and the option's price, on some option markets the quotes are given directly in terms of implied volatilities rather than in terms of prices expressed in currency units.
Under the (BSM) Black-Scholes-Merton model (outlined in Black and Scholes 1973 and Merton 1973) with an annualized implied volatility
of 20 percent and a risk-free rate of 5 percent, the price of the call option is $3.
Although there is no theoretical foundation to explain implied volatility
smiles, this could be supported if the assumptions for the pricing model (from where implied volatilities were obtained) were verified, in this case, by the Black 76 model.
One-week implied volatility
reflects market uncertainty about the exchange rate one week forward.
By purchasing the option with the lowest implied volatility
, or selling the option with the highest implied volatility
, we are making the most of our investment opportunities.
Chiras and Manaster (1978) compare the predictability of historical volatility and weighted implied volatility
for future stock returns variance.
7 ppt - was in Norilsk Nickel GDRs, while the largest decline in implied volatility
was in Rosneft GDRs, for which the implied fell 2.
1, implied volatility
was near the median level of 16.
A decline in actual volatility of the exchange rate in parallel with a decline in implied volatility