Login  Register

Re: Question about Black Formula results

Posted by Luigi Ballabio on Jul 26, 2005; 7:20am
URL: http://quantlib.414.s1.nabble.com/Question-about-Black-Formula-results-tp3942p3943.html

Benjamin Janson wrote:
>
> just to get a feel for the QuandLib I tried to implement a simple  
> call option with the Black formula. But the results won't make sense  
> to me.

Benjamin,
        the signature of the BlackFormula constructor is:

BlackFormula(Real forward,
              DiscountFactor discount,
              Real variance,
              const boost::shared_ptr<StrikedTypePayoff>& payoff);

You should pass as the first argument the forward price, and as the  
third argument its variance (that's where the maturity comes in.)

In your code, you should replace:

BlackFormula Black(underlying, discount_factor, vola, payoff);

with:

Real forward = underlying/discount_factor;
Real variance = vola*vola*maturity;

BlackFormula Black(forward, discount_factor, variance, payoff);

to use the class as intended.

This said, the results are still now what you expect---namely, I get:

Black Value: 2.72193
Black Delta: 0.556433
Black Gamma: 0.0625584
Black Vega: 10.4325
Black Rho: 8.08392

but the above are consistent with the results on a few other  
calculators I checked them against. Maybe there's something else  
missing? For instance, did your estimate include any cost of carry?

Later,
        Luigi


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

Olmstead's Law:
         After all is said and done, a hell of a lot more is said
         than done.