ImpliedVolatility bracketing exception

[Ken Anderson-2]

I'm trying to use the impliedVolatility method on a VanillaOption and  
I'm getting the following exception:

Underlying:66.900000
Strike 61.500000 Call  Price 7.750000 Expires:November 14th, 2006

java.lang.RuntimeException: root not bracketed: f[0.0001,4] ->  
[6.792459e-02,5.274040e+01]
        at org.quantlib.QuantLibJNI.VanillaOption_impliedVolatility__SWIG_4
(Native Method)
        at org.quantlib.VanillaOption.impliedVolatility(VanillaOption.java:89)

The strange thing is, this one works fine:

Strike 62.000000 Call  Price 7.460000  Volatility 0.09146919793826723


So, with all other parameters the same (they're the 61.50 and 62.00  
calls on an oil future expiring on Nov 14), one calculates, the other  
one gets a bracketing error.  I'm using the default impliedVolatility  
method, so the input values are the defaults (.0001 and 4 with I  
believe up to 100 iterations).

Since the volatility is pretty low for the $62 Call, is it possible  
that it's just too far off?  Since the 61.50 Call costs $7.75 and the  
62 Call costs $ 7.46, I can't see how they could be too far off from  
each other.

Any thoughts are appreciated...  I'm running in Java through SWIG in  
case anyone is interested - and it's the latest stable release.

Ken

[Luigi Ballabio]

On 03/15/2006 07:36:21 PM, Ken Anderson wrote:

> I'm trying to use the impliedVolatility method on a VanillaOption and  
> I'm getting the following exception:
>
> Underlying:66.900000
> Strike 61.500000 Call  Price 7.750000 Expires:November 14th, 2006
>
> java.lang.RuntimeException: root not bracketed: f[0.0001,4] ->  
> [6.792459e-02,5.274040e+01]
>
> The strange thing is, this one works fine:
>
> Strike 62.000000 Call  Price 7.460000  Volatility 0.09146919793826723

It seems that for the 61.5 call the quoted price is too low, and it  
cannot be reached by the formula no matter how low the volatility is.
What were your other parameters? (risk-free rate and such)

Later,
        Luigi


----------------------------------------

The doctrine of human equality reposes on this: that there is no man
really clever who has not found that he is stupid.
-- Gilbert K. Chesterson

[Ken Anderson-2]

Luigi,

Thanks for taking the time.  Here's all the initialization:

static DayCounter fixed365 = new Actual365Fixed();
static AnalyticEuropeanEngine engine = new AnalyticEuropeanEngine();

FlatForward flatDividentTS = new FlatForward(todaysDate, 0.0, fixed365);
FlatForward flatTermStructure = new FlatForward(todaysDate, .045,  
fixed365);
BlackConstantVol flatVolTS = new BlackConstantVol(todaysDate, .2,  
fixed365);
SimpleQuote underlyingQuote = new SimpleQuote
(underlyingCmv.marketValue.doubleValue());
BlackScholesProcess process = new BlackScholesProcess(new QuoteHandle
(underlyingQuote), new YieldTermStructureHandle(flatDividentTS),
                                                                                                                                                         new YieldTermStructureHandle(flatTermStructure),  
new BlackVolTermStructureHandle(flatVolTS));

Settings.instance().setEvaluationDate(todaysDate);
Date exerciseDate = DateConverter.dateForTimestamp
(optionPeriod.endTradingDateTime());
EuropeanExercise exercise = new EuropeanExercise(exerciseDate);

The evaluation date was March 13th - as was the settlement date.  
Expiration was Nov 14th.

All the values are straight off the Nymex for WTI, which is why it's  
so strange that the numbers could be that wrong.

Ken


On Mar 17, 2006, at 9:48 AM, Luigi Ballabio wrote:

>
> On 03/15/2006 07:36:21 PM, Ken Anderson wrote:
>> I'm trying to use the impliedVolatility method on a VanillaOption  
>> and I'm getting the following exception:
>> Underlying:66.900000
>> Strike 61.500000 Call  Price 7.750000 Expires:November 14th, 2006
>> java.lang.RuntimeException: root not bracketed: f[0.0001,4] ->  
>> [6.792459e-02,5.274040e+01]
>> The strange thing is, this one works fine:
>> Strike 62.000000 Call  Price 7.460000  Volatility 0.09146919793826723
>
> It seems that for the 61.5 call the quoted price is too low, and it  
> cannot be reached by the formula no matter how low the volatility is.
> What were your other parameters? (risk-free rate and such)
>
> Later,
> Luigi
>
>
> ----------------------------------------
>
> The doctrine of human equality reposes on this: that there is no man
> really clever who has not found that he is stupid.
> -- Gilbert K. Chesterson

[Luigi Ballabio]

Ken,
        I've reproduced your example in C++ (the code is below, you  
might want to check whether I made any mistakes) and I do get a figure  
for the implied volatility. If my code correspond to yours (except for  
the fact that I'm using the upcoming 0.3.12 release) it might be  
something weird in the Java wrappers. On what platform are you working?  
And did you compile QuantLib as a shared or a static library?

Later,
        Luigi


----------------------------------------

All generalizations are dangerous, even this one.
-- Alexandre Dumas

[Ken Anderson-2]

Luigi,

I'm sorry, but I don't see any code attached.  To answer your  
questions, I'm using .3.11 with the Java wrappers.  The libraries are  
static, and I'm using Mac OS X.

If you could send the code, I'd really like to review it.

Thanks,
Ken


On Mar 20, 2006, at 8:45 AM, Luigi Ballabio wrote:

>
> Ken,
> I've reproduced your example in C++ (the code is below, you might  
> want to check whether I made any mistakes) and I do get a figure  
> for the implied volatility. If my code correspond to yours (except  
> for the fact that I'm using the upcoming 0.3.12 release) it might  
> be something weird in the Java wrappers. On what platform are you  
> working? And did you compile QuantLib as a shared or a static library?
>
> Later,
> Luigi
>
>
> ----------------------------------------
>
> All generalizations are dangerous, even this one.
> -- Alexandre Dumas

[Luigi Ballabio]

On 03/20/2006 03:02:59 PM, Ken Anderson wrote:
> I'm sorry, but I don't see any code attached.

Ouch. Now it is attached.

Luigi


----------------------------------------

The young man knows the rules, but the old man knows the exceptions.
-- O. W. Holmes