Talk:Implied volatility
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I removed the discussion on Volatility Smile and redirected to a new page. In particular, the description contain errors, such as:
The implied volatility is typically significantly higher for in-the-money stock and interest-rate call options, i.e. call options with strikes lower than the current forward rate, than at-the-money options. Out-of-the-money call options on stocks and interest rates typically have a higher implied volatility than at-the-money. Plotting the graph of strike versus implied volatility therefore leads to a picture that looks something like a smile - hence the name of the phenomenon.
In fact, for stocks, it's all 'downside' (low-strike) options that have higher implied volatility while all 'upside' options have lower implied vol.
The nature of volatility smile (skew) and term structure of volatility is inter-related and I think it merits it's own page.
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[edit] Example
What is "the forward rate for 2 year into 1 year LIBOR"?--Jerryseinfeld 15:24, 1 Apr 2005 (UTC)
What is the "discount factor for value of money in two years time"? That here "is 0.9"? The value of money in two years is supposed to be 0.9 times todays value? 1.9 times todays value?--Jerryseinfeld 15:24, 1 Apr 2005 (UTC)
[edit] Definition
implied volatility of a financial instrument
Doesnt this only apply to options? Any other type of financial instrument that has an implied volatility?--Sgcook 09:34, 10 January 2006 (UTC)
- Yes, the only financial instruments whose value depends on the underlier's volatility are options, and thus only options can have an implied volatility. However many different types of instruments can have embedded optionality - for instance, an interest rate cap.
[edit] Proposed rewrite
I think a better approach for this article would be to:
- better motivate how to generate implied volatility from pricing models,
- describe the inability to invert pricing models that causes the use of root-finding techniques,
- discuss which root-finding techniques are used and why,
- why quoting options on a volatility basis is a more useful measure of relative value than quoting on a price basis.
This is a fairly major rewrite I've got in mind. Any objections and/or comments, etc.? Ronnotel 14:31, 16 October 2006 (UTC)
- Silence interpreted as consent. Changes have been made, please review, comment & revise as appropriate Ronnotel 16:03, 17 October 2006 (UTC)
[edit] IV as forecast tool
The statement "Implied volatility is useful for forecasting the market" needs to be supported by some evidence. I'm not saying it's wrong, but this assertion its own it doesn't help very much. Can you elaborate? Also, it doesn't belong in the example section - can you find another place to put this idea? Ronnotel 15:03, 23 February 2007 (UTC)
[edit] IV on option or undelier
Behshour, I reverted your change because it's inaccurate to describe iv as belonging to the underlier. I understand what you're getting at - i.e. it's the volatility of the underlying asset's price, not the option. However, each of the multiple options written on an underlier can implied a different volatility, so saying that implied volatility is the volatility of an underlier seems odd. I think it's better to associate it with the option on whose price the iv is calculated. Ronnotel 03:23, 7 November 2007 (UTC)
