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A New Algorithm for Computing Implied VolatilityKawee NumpacharoenPhatra Securities; Mahidol University - Department of Mathematics Kornkanok BunwongMahidol University - Department of Mathematics July 13, 2011 East-West Journal of Mathematics, Forthcoming Abstract: In this study, we simplified the Black-Scholes formula to a two-input version. This simplified formula presents a one-to-one relationship with one input given that the other input is fixed. With this simplified formula, we created an option-price data grid and showed that the implied volatility can be obtained by interpolation. This interpolation-based algorithm does not require iteration and has an adjustable accuracy, which is very useful in computing implied volatilities for a large number of options in a real-time environment.
Number of Pages in PDF File: 13 Keywords: implied volatility, option pricing, Black-Scholes formula, European options JEL Classification: G13, C63 Accepted Paper SeriesDate posted: July 3, 2011 ; Last revised: August 15, 2012Suggested Citation |
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