0
$\begingroup$

I am trying to compute the implied volatility of the OBM contract (on Euronext), using R, and I was wondering if, for the time to maturity, I should put the time until the contract expires or the time until the last trading day of the option. There is a difference.. For example : an option expiring on the 10th of March can be traded until February the 15th of the same year.

Thank you in advance

Improve this question
$\endgroup$

1 Answer 1

Reset to default
2
$\begingroup$

Volatility time to maturity should be until the option expires. Also be careful that these are options on futures so pricing should be with zero drift for the underlying (see e.g. Black 76 formula).

Improve this answer
$\endgroup$
4
  • $\begingroup$ Thank you for your reply, I am new to finance and it is the first time that I read about the Black 76 model. But I'm a bit confused, does that change the implied volatility formula? $\endgroup$
    – Narjems
    Commented Oct 29, 2018 at 20:07
  • $\begingroup$ As you know there is no "implied volatlity formula" (it is an iterative process), but yes it is different. Some people write separate code commoditymodels.wordpress.com/2012/07/28/… , but it is also easy to write one routine that can handle the BSM, BS and Black76 cases interchangeably because they are so closely related. $\endgroup$
    – Alex C
    Commented Oct 29, 2018 at 21:47
  • 1
    $\begingroup$ If you already have available a function that computes the Black & Scholes implied volatility (typically implemented using a root search algorithm such as Newton-Raphson to find the volatility such that the recomputed price matches the inputted price, as mentionned by @Alex C), then you can use it for Black 76 by setting the dividend rate equal to the interest rate. This is because the risk neutral drift for the underlying is $E[dS/S] = (r - d) dt$ where $r$ is the interest rate and $d$ is the dividend rate, so that taking $d = r$ will ensure that $S$ has zero drift. $\endgroup$
    – Antoine Conze
    Commented Oct 30, 2018 at 10:03
  • $\begingroup$ Thank you @AlexC and Antoine Conze. Great explanations $\endgroup$
    – Narjems
    Commented Oct 30, 2018 at 15:00

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.