Dear Katherine,
I'm an option trader not a risk manager and it is my own opinion only:
you need simulate both: dynamics of underlying and volatility. I would use
physical volatility to pricing an option, and apply the GARCH models to do
it. But only for simplifying.
If you want to do it "difficult and correct" you need to model mutual
dynamics: underlying, ATM volatility, and skew of volatility - it is "a
little bit" more difficult task. Ask Google about "value at risk for
derivatives"
Best regards,
Oleg Mubarakshin
-----Исходное сообщение-----
From: Katherine Gobin
Sent: Thursday, May 08, 2014 3:56 PM
To: [email protected]
Subject: [R-SIG-Finance] Implied Volatility
Dear Forum,
I am not sure if I can raise this query here. I am trying to use Monte Carlo
simulation for Call option VaR and for this I have simulated 1000 values
each of the risk factors. I am using the Black Scholes for finding the
premium. One of the input required to use Black Scholes is volatility
besides Strike price, spot price, time to maturity and risk free rate.
My question is am I supposed to use Implied volatility or historical
volatility? I tried to find out the answer through some sources but yet to
get some concrete answer. I am using RQuantLib for calculating the Implied
Volatility and its an European option.
If possible kindly guide.
Regards
Katherine Gobin
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