Implied Volatility

In financial mathematics, the implied volatility of an option contract is that value of the volatility of the underlying instrument which, when input in an option pricing model(such as Black-Scholes) will return a theoretical value equal to the current market price of the option. A non-option financial instrument that has embedded optionality, such as an interest rate cap, can also have an implied volatility. Implied volatility, a forward-looking and subjective measure, differs from historical volatility because the latter is calculated from known past returns of a security.

Read more about Implied Volatility:  Motivation, Solving The Inverse Pricing Model Function, Implied Volatility As Measure of Relative Value, Implied Volatility As A Price, Non-constant Implied Volatility, Volatility Instruments

Famous quotes containing the word implied:

    The citizen who criticizes his country is paying it an implied tribute.
    J. William Fulbright (1905–1995)