Reference no: EM132964335

You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design, production, and distribution of lighting equipment and speciality products worldwide.

Mal Clissold, the company president, is concerned about the company risk and states that you can find the estimated coliatiable of the stock for future periods by calculating the implied standard deviation of options contracts on the company stock. When you examine the factors that affect the price of an optin, all of the factors except the standard deviation of the stock are directly observed in the market. Mal states that because you can observe all of the factors except the stand deviation, you can solve the Black-Scholes model and find the implied standard deviation.

To help you find the implied standard deviation of the company's stock, Mal has provided you with the following option prices on foru call options that expire in six months. The risk-free is 4 percent and the current stock price is $53.

STRIKE PRICE         OPTION PRICE
$50                           $12.78
$55                          $10.14
$60                            $7.99
$65                               $5.81

Problem 1: How many different volatilities would you expect to see for the stock?

Problem 2: Unfortunately, solving for the implied standard deviation is not as easy as Mal suggests. In fact, there is no direct solution for the standard deviation of the stock even if we have all the other variables for the Black-scholes model. Mal still would like to estimate the implied standard deviation of the stock. To do this, set up a spreadsheet using the Solver function in Excel to calculate the implied volatilities of each option.

Problem 3: Are all of the implied volatilities for the options the same? What are the possible reasons that can cause different volatilities for these options?

Problem 4: After you discuss the importances of volatility on options proxies, your boss mentions that he has bread of the VIX. What is the VIX and what does it represent?

Problem 5: When you are on the CBOE website, look for the opton quotes for the VIX. What does the implied volatility of the VIX option represent?