How is estimate of volatility or the implied volatility used
How is estimate of volatility or the implied volatility used?
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When you hedge options you have to select whether to utilize a delta based on your own estimate of volatility or the implied volatility. If you need to ignore fluctuations in your mark-to-market P and L you will hedge by using the implied volatility, even if you may believe this volatility to be incorrect.
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What is implied volatility? Answer: Implied volatility is number into the Black–Scholes formula which makes a theoretical price equal a market price.
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