Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

When pricing European options (call or put) using the famous Black-Scholes model, one assumption is that the volatility is constant. My question is, if we

When pricing European options (call or put) using the famous Black-Scholes model, one assumption is that the volatility is constant.

My question is, if we are assuming that the volatility is stochastic, is there supposed to be any difference in the pricing of the option compared to when we assuming that the volatility is constant? and if there is what is the intuition behind this?

Thank you for any answer.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Reporting Standards An Introduction

Authors: Belverd Needles, Marian Powers

2nd edition

053847680X, 978-1111793234, 1111793239, 978-0538476805

More Books

Students also viewed these Finance questions