20.7 Time varying volatility Suppose the volatility is o for the first year and o, for the second and third Total accumulated variance at the end of three years isσ2+22 The 3-year average volatility is +20 +20 3 Options, Futures, and other Derivatives, 5th edition 2002 by John C. HullOptions, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 20.7 Time Varying Volatility • Suppose the volatility is 1 for the first year and 2 for the second and third • Total accumulated variance at the end of three years is 1 2 + 22 2 • The 3-year average volatility is 2 2 2 2 2 1 2 1 2 2 3 2 ; 3  +   =  +   =