Testing the Implied Volatility Smile of a Lognormal Distribution on a 3 - Month Danske Bank Call Option Contract Using the Option Delta
Author | : Michel Guirguis |
Publisher | : |
Total Pages | : |
Release | : 2019 |
ISBN-10 | : OCLC:1304227118 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Testing the Implied Volatility Smile of a Lognormal Distribution on a 3 - Month Danske Bank Call Option Contract Using the Option Delta written by Michel Guirguis and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the implied volatility smile of a lognormal distribution on a 3 - month Danske bank call option contract using the option delta. There is significant time variation in the implied volatility smile and the traditional Black - Scholes model can not explain this deviation. The Black - Scholes model is used to calculate the theoretical call option price. Applying a lognormal implied distribution help us to price the contract at a market price and get better estimates of a risk adjusted measure. Deep in or out of the money contract has higher implied volatility. We have found that the 3- month Danske bank call option contract is not overpriced relative to other call market prices. The 3 - month call contract with short maturity show high market standard deviation relative to the other call prices. Possible explanations of volatility smile are bid - ask spreads, transactions costs and leverage.