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Implied volatility
       
 
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Implied volatility

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Implied volatility
The value of Volatility embedded in an Option price. All things being equal, higher implied Volatility Will lead to higher Vanilla option prices and vice versa. The effect of changes in Volatility on an Option’s price is known as Vega. If an Option’s Premium is known, its implied Volatility can be derived by inputting all the known factors into an Option pricing model (the current price of the Underlying, Interest rates, the time to maturity and the Strike Price). The model Will then calculate the Volatility assumed in the Option price, which Will be the market’sbest estimate of the Future Volatility of the Underlying.

See also Option, Volatility Skew, Volatility term structure
Posted by  Privatebanking.com
 
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