I remember John Hull?s book on option pricing should be helpful in finding some examples for your programming and modelling. Some assumptions of the Black-Scholes model are known to be impractical. ?Implied volatility? is one way to handle that. Again you can find books for theoretical discussions to improve Black-Scholes. My suggestions do not stick to your particular questions. But hope the above may help. Hong Yu From: thp Sent: Thursday, June 09, 2016 2:03 PM 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.
Option pricing, basic question
1 message · Hong Yu