In the option pricing methods we have learned so far, a number of parameters are assumed to be constant: interest rates, strike prices, dividends, and volatility. Here, the parameter of interest is volatility. In quantitative research, the volatility ratio is used to forecast price trends.
To derive implied volatilities, we need to refer to Chapter 3, Nonlinearity in Finance, where we discussed the root-finding methods of nonlinear functions. We will use the bisection method of numerical procedures in our next example to create an implied volatility curve.
