QuoteOriginally posted by: DrEvilThe 'local volatility' at price S and time t is a function v(S,t) such when the process dS/S = r dt + v(S,t) dZ is simulated, all option prices match those seen in the market. I have a confusion to what is referred in Dr.Wilmott's text - chapter on implied vol in 'Quantitative Finance' book.It mentions that implied vol. is an estimate of future realized volatility at a point. (If I have understood properly! ) My confusion is, should not the market option prices reflect the realized local volatility v(S,t) + uncertainity component in estimation of future volatility ? Could someone please help?Thanks,Asd
Last edited by asd
on April 23rd, 2004, 10:00 pm, edited 1 time in total.