A New Algorithm for Computing Implied Volatility

East-West Journal of Mathematics, Forthcoming

13 Pages Posted: 3 Jul 2011 Last revised: 15 Aug 2012

Kawee Numpacharoen

Phatra Securities; Mahidol University - Department of Mathematics

Kornkanok Bunwong

Mahidol University - Department of Mathematics

Date Written: July 13, 2011

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.

Keywords: implied volatility, option pricing, Black-Scholes formula, European options

JEL Classification: G13, C63

Suggested Citation

Numpacharoen, Kawee and Bunwong, Kornkanok, A New Algorithm for Computing Implied Volatility (July 13, 2011). East-West Journal of Mathematics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1857206 or http://dx.doi.org/10.2139/ssrn.1857206

Kawee Numpacharoen (Contact Author)

Phatra Securities ( email )

Bangkok, 10310
Thailand

Mahidol University - Department of Mathematics ( email )

Bangkok, 10400
Thailand

Kornkanok Bunwong

Mahidol University - Department of Mathematics ( email )

Bangkok, 10400
Thailand

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