Standard Approach to Estimating Volatility (Equation 15.1 Define on as the volatility per day between day n-1 and day n, as estimated at end of day n-1 · Define, as the value of market variable at end of day i Define ui= In(S /Si-1)
Example AFI has SOLD for $300,000 a European call on 100,000 shares of a non-dividend paying stock: S 0 =49 =50 r=5%=20% μ=13% T =20 weeks The Black-Scholes value of the option is $240,000 How does the Fl hedge its risk?
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