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Numerical Approximation of the Implied Volatility Under Arithmetic Brownian Motion

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Author Info
Jaehyuk Choi
Kwangmoon Kim
Minsuk Kwak
Abstract

We provide an accurate approximation method for inverting an option price to the implied volatility under arithmetic Brownian motion, which is widely quoted in Fixed Income markets. The maximum error in the volatility is in the order of 10-10 of the given option price and much smaller for the near-the-money options. Thus our approximation can be used as an exact solution without further refinements of iterative methods.

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File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/13504860802583436&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 16 (2009)
Issue (Month): 3 ()
Pages: 261-268
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Handle: RePEc:taf:apmtfi:v:16:y:2009:i:3:p:261-268

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Related research
Keywords: Normal implied volatility; basis point volatility; arithmetic Brownian motion; rational approximation; closed form approximation;

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This page was last updated on 2010-1-6.

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