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I am wondering if it is, in theory, correct to assume the ISD as the risk-neutral measure of the volatility of the underlying asset and if it is appropriate to price derivatives on the ISD.

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    $\begingroup$ How do you define / compute ISD? How is it different from Implied Vol? $\endgroup$
    – AKdemy
    Oct 31, 2023 at 9:21
  • $\begingroup$ @AKdemy I would expect the two to be used relatively interchangeably. Please correct me if I were wrong. $\endgroup$ Oct 31, 2023 at 12:16
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    $\begingroup$ That's what I thought but in that case I am quite puzzled about the question. What exactly is unclear? Some markets (predominantly listed) are price quoted, some (predominantly OTC) are vol quoted. Either way, IV is just the value that, plugged into the option pricing formula, provides you with the market price. If you have the market price, it's the value that you get by solving for IV, hence the name. Some details can be found here. Or put differently, how else would you price derivatives (without IV)? $\endgroup$
    – AKdemy
    Oct 31, 2023 at 13:14

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