Effect of Implied Volatility on Option Prices using two Option Pricing Models

Financial derivatives have been drawing increasing interest in recent days. Among these, Options are the most basic and fundamental derivates. European options are most widely used in Indian stock exchanges. There are different types of options available for pricing; Black-Scholes is one of such type. Black-Scholes model is used for pricing options to calculate the premium value. In the early 1960’s, many mathematicians such as Sprekle, Ayes, A. James Boness, Chen etc. worked on the valuation of options. In 1973, Fischer Black and Myron Scholes developed the options pricing formula, which later made use of partial differential equation with coefficient variables. It uses historical volatility as a measure of calculation with various assumptions. Yuang (2006) used the concept of implied volatility. In 1993, Heston proposed a stochastic volatility model. It used the assumption that the asset variance v follows t a mean reverting Cox-Ingersoll-Ross process. Read more