Option Pricing Analysis with Implied Volatility

Abstract

Option pricing is one of the most attractive problem to traders, and the most effective and widely applied model for option pricing is the Black-Scholes model.By constructing implied volatility surface, we can overcome the biggest shortcoming of this model, which is the assumption of constant volatility. The goal of the thesis is to prove the existence of implied volatility smile and construct implied volatility surface to price stock options and lookback options. Through comparative analysis, implied volatility is proved to be the most reliable and accurate volatility to price options compared with historical volatility and at-the-money volatility.

By constructing implied volatility surface, we can overcome the biggest shortcoming of this model, which is the assumption of constant volatility. option pricing, Black-Scholes model, implied volatility, lookback option, stock option