Derive the formula to estimate the volatility parameter (used in the Black-Scholes formula) using opening and closing prices of a first local bank (FLB) share traded at Pampoenkraal Stock Exchange. Provide necessary details.
The formula to estimate the volatility parameter is as follows: Volatility Parameter = Square Root of [(Sum of (Close Price - Open Price)^2) / (Number of Periods)]
Explanation:
The volatility parameter can be estimated using the following steps:
1. Calculate the difference between the close price and the open price for each period.
2. Square the differences from step 1.
3. Sum the squares from step 2.
4. Divide the sum from step 3 by the number of periods.
5. Take the square root of the result from step 4.
This will give the volatility parameter for the FLB share.
The volatility parameter can be estimated using opening and closing prices of a first local bank (FLB) share traded at Pampoenkraal Stock Exchange. The necessary details are as follows:
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