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Black-Scholes Approximations of Call Option Prices with Stochastic Volatilities: A Note

Published online by Cambridge University Press:  06 April 2009

Thomas J. Finucane
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Abstract

A piecewise linear weighting function for Black-Scholes implied volatilities is used in conjunction with the Black-Scholes call pricing model to approximate stochastic volatility European call prices. A sensitivity analysis is conducted to compare simulated stochastic volatility call prices to the Black-Scholes prices calculated with the weighted implied volatilities. The analysis indicates that a simple model can provide close approximations to the simulated prices with far less computational effort.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 4 , December 1989 , pp. 527 - 532
Copyright
Copyright © School of Business Administration, University of Washington 1989

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