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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
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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
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The person who wrote this article has a gross misunderstanding of the relationship of the components of the BS model. It is GIVEN THAT OPTION PRICES ARE CORRECT, therefore, it is implied volatility that is the single unknown that is to be solved for.
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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
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This seems to have been written to confuse. It doesn't explain how the data come together, it just hands you the numbers, then shows you the final step. It needs to show the whole process, not just the result.
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This is indirectly supported by the comment: "Implied volatility is so important that options are often quoted in terms of volatility rather than price, particularly between professional traders."
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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?--
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Just popped in to remove the word "futures" with respect to how the VIX is derived. It is derived from SPX options, not SP or ES-- which are futures.
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In fact, for stocks, it's all 'downside' (low-strike) options that have higher implied volatility while all 'upside' options have lower implied vol.
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These professional's are quoting implied volatility because THAT IS THE UNKNOWN. The option price is both known and accepted as being correct.
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volatility of an underlier seems odd. I think it's better to associate it with the option on whose price the iv is calculated.
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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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This article is or was the subject of a Wiki
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why quoting options on a volatility basis is a more useful measure of relative value than quoting on a price basis.
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Silence interpreted as consent. Changes have been made, please review, comment & revise as appropriate
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Doesnt this only apply to options? Any other type of financial instrument that has an implied volatility?--
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Knowledge. If you would like to participate, please visit the project page, where you can join
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describe the inability to invert pricing models that causes the use of root-finding techniques,
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This is a fairly major rewrite I've got in mind. Any objections and/or comments, etc.?
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and redirected to a new page. In particular, the description contain errors, such as:
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The implied volatility is typically significantly higher for
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Definition of implied volatility of a financial instrument
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What is "the forward rate for 2 year into 1 year LIBOR"?--
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I think a better approach for this article would be to:
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discuss which root-finding techniques are used and why,
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