I need to calculate the value of an European option on a listed share. The payout is a cash payout of the 5 day volume weighted average price (VWAP) above the strike price at expiry date. The 5 day vwap is calculated by taking the total value divided by the total volume for the 5 days before expiry (including the expiry date)
I want to calculate the value using the Black Scholes formula. I have the risk free rate and dividend yield. I'm unsure what to use for the spot price and the volatility.
For the spot price, I believe I should use the current 5 day VWAP since that is what will be used to calculate the payout (as opposed to using the closing share price on the valuation date)
There is no actively traded options for this listed entity, so I'll be using historical prices to calculate the historical volatility. Here I'll use daily closing share prices to calculate volatility.
Does this approach make sense?