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CHAPTER 22 CASE C-1
CHAPTER 22
CLISSOLD INDUSTRIES OPTIONS
1. Since the Black–Scholes model uses the standard deviation of the underlying asset, and there is only
2. To find the implied volatility for an option, you can set up a spreadsheet to calculate the option price.
The Solver function in Excel will allow you to input the desired price and will solve for the desired
unknown variable. We did this (the spreadsheet is available), and the implied standard deviation for
each of the options is:
Strike Price Option Price Implied Standard Deviation
3. There are two possible explanations. The first is model misspecification. Although the Black–
Scholes option pricing model is widely acclaimed, it is possible that the model specifications are
incorrect. One potential variable that is incorrectly specified is the assumption of constant volatility.
In fact, the volatility of the underlying stock is itself volatile, and will increase or decrease over time.
The Black–Scholes model may also ignore important variables. For example, Fisher Black describes
A second possible explanation is liquidity. At- or near-the-money options tend to be more liquid than
4. The VIX is a benchmark for stock market volatility. The VIX is based on option prices, which reflect
5. The VIX uses eight different S&P 100 Index (OEX) option series to represent the implied volatility
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