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Correct Method for Calculating Implied Volatility

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alex

Correct Method for Calculating Implied Volatility

Hi,

I want to use QuantLib to compute the implied volatility for an American option with dividends.

I essentially follow the example here [0]. The issue I'm having is that initializing the BlackScholesProcess, which is required by the impliedVolatility function, uses a volatility term structure. In turn, this term structure takes in a Real for volatility, the thing I am trying to calculate.

What's the correct way to get this initial volatility? I thought about using a BlackScholesCalculator and Brent solver to estimate it but wasn't sure if that was a good approach.

[0] http://www.bnikolic.co.uk/blog/ql-american-disc-dividend.html

Thanks,

Alex Lamana

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Luigi Ballabio

Re: Correct Method for Calculating Implied Volatility

The impliedVolatility() function will ignore whatever you put into the volatility and only use the rest of the process. Just initialize it with any value.

Luigi

On Wed, Mar 25, 2015 at 3:50 PM, Alexander Lamana <[hidden email]> wrote:

Hi,

I want to use QuantLib to compute the implied volatility for an American option with dividends.

I essentially follow the example here [0]. The issue I'm having is that initializing the BlackScholesProcess, which is required by the impliedVolatility function, uses a volatility term structure. In turn, this term structure takes in a Real for volatility, the thing I am trying to calculate.

What's the correct way to get this initial volatility? I thought about using a BlackScholesCalculator and Brent solver to estimate it but wasn't sure if that was a good approach.

[0] http://www.bnikolic.co.uk/blog/ql-american-disc-dividend.html

Thanks,
Alex Lamana

------------------------------------------------------------------------------
Dive into the World of Parallel Programming The Go Parallel Website, sponsored
by Intel and developed in partnership with Slashdot Media, is your hub for all
things parallel software development, from weekly thought leadership blogs to
news, videos, case studies, tutorials and more. Take a look and join the
conversation now. http://goparallel.sourceforge.net/
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Luigi Ballabio

Re: Correct Method for Calculating Implied Volatility

ql/instruments/dividendvanillaoption.cpp, line 52. It calls ImpliedVolatilityHelper::clone, which creates a new process with the same underlying, risk-free rate and dividend yield but whose volatility is based on the quote he's going to use during the solving process.

On Wed, Mar 25, 2015 at 4:15 PM, Alexander Lamana <[hidden email]> wrote:

Great, thanks! I missed that when reading the code. Would you mind pointing out where it's overridden?

On Wed, Mar 25, 2015 at 11:03 AM, Luigi Ballabio <[hidden email]> wrote:
The impliedVolatility() function will ignore whatever you put into the volatility and only use the rest of the process. Just initialize it with any value.

Luigi

On Wed, Mar 25, 2015 at 3:50 PM, Alexander Lamana <[hidden email]> wrote:
Hi,

I want to use QuantLib to compute the implied volatility for an American option with dividends.

I essentially follow the example here [0]. The issue I'm having is that initializing the BlackScholesProcess, which is required by the impliedVolatility function, uses a volatility term structure. In turn, this term structure takes in a Real for volatility, the thing I am trying to calculate.

What's the correct way to get this initial volatility? I thought about using a BlackScholesCalculator and Brent solver to estimate it but wasn't sure if that was a good approach.

[0] http://www.bnikolic.co.uk/blog/ql-american-disc-dividend.html

Thanks,
Alex Lamana

------------------------------------------------------------------------------
Dive into the World of Parallel Programming The Go Parallel Website, sponsored
by Intel and developed in partnership with Slashdot Media, is your hub for all
things parallel software development, from weekly thought leadership blogs to
news, videos, case studies, tutorials and more. Take a look and join the
conversation now. http://goparallel.sourceforge.net/
_______________________________________________
QuantLib-users mailing list
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<https://leanpub.com/implementingquantlib/>

<https://implementingquantlib.blogspot.com>
<https://twitter.com/lballabio>