Volatility Models: Introducing volatility
Sergei Mikhailov
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In the following we use the next notations:
Introducing volatility
The concept of volatility is probably the most investigated phenomenon in modern day finance. The vast interest in volatility is
motivated by two related reasons. The growing number of companies utiliz-ing risk management and the huge amount of derivatives
traded on today’s exchange markets. The fair price of an option is determined by a number of factors including the volatility of the
underlying asset. All these factors except the volatility are directly observable from the market or specified by the option contract. The
precise account of the volatility is notoriously difficult, but crucial for the correct risk evaluation and options pricing.
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