[R-SIG-Finance] Option pricing, basic question
Oleg Mubarakshin
oleg.mubarakshin at gmail.com
Thu Jun 9 18:11:03 CEST 2016
Hi Tom!
I hope you do not try to get option prices with using vol calculated from
underlying (so called realized or historical vol).
BSM model is a model based on GBM, that we do not see in the real markets of
course.
Real markets express skew and fat tails in log-return distributions, that
leads to vol skew and higher implied vol of deep OTM options.
For modeling of option prices often use:
1. Stochastic vol models
2. Local vol models
3. Stochastic local vol models
these models is constructed for catch the effects described by me above.
I hope it will help you!
Kind regards,
Oleg Mubarakshin
-----Исходное сообщение-----
From: thp
Sent: Thursday, June 09, 2016 9:02 AM
To: r-sig-finance at r-project.org
Subject: [R-SIG-Finance] Option pricing, basic question
Hello,
I have a question regarding option pricing. In advance:
thank you for the patience.
I am trying to replay the calculation of plain
vanilla option prices using the Black-Scholes model
(the one leading to the analytic solution seen for
example on the wikipedia page [1]).
Using numerical values as simply obtained from
an arbitrary broker, I am surprised to see that
the formula values and quoted prices mismatch
a lot. (seems cannot all be explained by spread
or dividend details)
My question: What values for r (drift) and \sigma^2
are usually to be used, in which units?
If numerical values are chosen to be given "per year",
then I would expect r to be chosen as \ln(1+i),
where i is the yearly interest rate of the risk-free
portfolio and \ln is the natural logarithm. Would the
risk-free rate currently be chosen as zero?
The \sigma^2 one would accordingly have to choose
as the variance of the underlying security over
a one year period. Should this come out equal in
numerical value to the implied volatility, which is
0.2 to 0.4 for the majority of options?
Tom
[1] https://de.wikipedia.org/wiki/Black-Scholes-Modell
_______________________________________________
R-SIG-Finance at r-project.org mailing list
https://stat.ethz.ch/mailman/listinfo/r-sig-finance
-- Subscriber-posting only. If you want to post, subscribe first.
-- Also note that this is not the r-help list where general R questions
should go.
More information about the R-SIG-Finance
mailing list