Fiona Brown, who regularly invests in the options market, knows that a higher stock price usually leads to a higher call price and a lower put price. She would like to see how an increase in the exercise price, E, of a stock will effect call and put options. Fiona has already built a worksheet of the Black–Scholes option pricing model (see Figure 4.16) containing data of her favourite stock.

She will use this model to perform some sensitivity analysis, varying the current exercise price of

£40 from £30 to £50. Next day, Fiona sees that the option’s call price has risen from its original value of £3.57 to £3.88. She now wishes to find the stock’s implied volatility.