If I use theoretical prices under a normal valuation model, and I estimate their implied volatility using BLACK SCHOLES implied volatility, do I'll get corresponding log normal volatility?

  • $\begingroup$ To find the theoretical prices then you will have to use a guess at volatility. If you use that theoretical price, your implied volatility will simply be your guess. That volatility, BTW, is annual, log-normal volatility, because of the Ln(S0/K) in the calculation of d1. $\endgroup$
    – rajah9
    Dec 17 '13 at 21:11
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    $\begingroup$ How do you define "theoretical prices"? Option prices or the prices of the underlying? Keep in mind that price volatility of the underlying or the option itself are completely different concepts from implied volatility, even the dynamics of their correlations are completely unpredictable. $\endgroup$
    – Matt
    Dec 18 '13 at 5:56
  • $\begingroup$ With "theoretical prices" I mean risk free option prices. $\endgroup$ Dec 18 '13 at 12:32
  • $\begingroup$ I think this is a similar question: quant.stackexchange.com/questions/28186/… $\endgroup$ Feb 17 '17 at 8:21

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