Question

6. A call option on a non-dividend-paying stock has a market price of $2.50. The stock price is $15, the exercise price is $13, the time to maturity is three months, and the risk-free interest rate is 5% per annum. What is the implied volatility?

Answer 1

The implied volatility is 39.5%

Use a Black-Scholes Calculator to find the implied volatility of the stock with the following inputs

SPOT = 15

STRIKE = 14

EXPIRY = 3 months (Set the date to 3 months from today)

risk-free rate = 5%

Adjust the implied volatility until the price of the call option is equal to 2.5. At Volatility = 39.5%, the price of the option is $2.5

For a given volatility, if the price of the option is less than $2.5, then adjust the volatility upwards and vice versa.

Below is a screenshot of Black_Scholes Calculator used to calculate the implied volatility of the stock.

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