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Lecture 17
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Calculate the Annualized variance of the daily relative price change Square root to arrive at standard deviation Standard deviation is the volatility
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Develop Spreadsheet Download data from internet http://finance.yahoo.com
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All variables in the option price can be observed, other than volatility. Even the price of the option can be observed in the secondary markets. Volatility cannot be observed, it can only be calculated. Given the market price of the option, the volatility can be “reverse engineered.”
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Use Numa to calculate implied volatility. Example (same option) P = 41r = 10%PRICE = 2.67 EX = 40t = 30 days / 365v = ???? Implied volatility = 42.16%
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CBOE Example Use Actual option ◦ Calculate historical volatility ◦ Calculate implied volatility http://www.math.columbia.edu/~smirnov/options13.html http://www.cboe.com http://www.numa.com
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Given a normal or lognormal distribution of returns, it is possible to calculate the probability of having an stock price above or below a target price. Wouldn’t it be nice to know the probability of making a profit or the probability of being “in the money?”
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Steps for Infinite Distribution of Outcomes
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Example Example (same option) P = 41r = 10%v =.42 EX = 40t = 30 days / 365
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Example (same option) P = 41r = 10%v =.42 EX = 40t = 30 days / 365 $2.67 40 42.67 37% 58% 63%
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Example Price = 36Ex-Div in 60 days @ $0.72 t = 90/365r = 10% P D = 36 -.72 e -.10(.1644) = 35.2917 Put-Call Parity Amer D+ C + S - P s > Put > Se -rt - P s + C + D Euro Put = Se -rt - P s + C + D + CC
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Class discussion
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