AmericanBinomPut_ImpVol

Purpose

Computes implied volatilities for American put options using the binomial method.

Format

sigma = AmericanBinomPut_ImpVol(c, S0, K, r, div, tau, N)
Parameters:
  • c (Mx1 vector) – put premiums
  • S0 (scalar) – current price.
  • K (Mx1 vector) – strike prices.
  • r (scalar) – risk free rate.
  • div (scalar) – continuous dividend yield.
  • tau (scalar) – elapsed time to exercise in annualized days of trading.
  • N (scalar) – number of time segments. A higher number of time segments will increase accuracy at the expense of increased computation time.
Returns:

sigma (Mx1 vector) – volatility.

Examples

p = { 14.60, 17.10, 20.10 };
S0 = 718.46;
K = { 720, 725, 730 };
r = .0498;
div = 0;

t0 = dtday(2001, 1, 30);
t1 = dtday(2001, 2, 16);
tau = elapsedTradingDays(t0, t1) /
    annualTradingDays(2001);

sigma = AmericanBinomPut_ImpVol(p, S0, K, r, 0, tau, 30);
print sigma;

produces:

0.21533207
0.21072787
0.21309324

Remarks

The binomial method of Cox, Ross, and Rubinstein (“Option pricing: a simplified approach,” Journal of Financial Economics, 7:229:264) as described in Options, Futures, and other Derivatives by John C. Hull is the basis of this procedure.

Source

finprocs.src