Which Volatility Measure Is Used in the Black-Scholes Model?
The Black-Scholes option pricing model uses implied volatility (IV) as an input, or it can be used to derive the IV from the option's market price. While the model requires an estimate of future volatility, in practice, the market price is used to back-solve for the implied volatility.
Glossar
The Black-Scholes Model
Foundation ⎊ The Black-Scholes model serves as the cornerstone for modern options pricing theory, providing a continuous-time framework for calculating the fair value of derivatives.
Black-Scholes Option Pricing Model
Framework ⎊ The Black-Scholes Option Pricing Model provides a foundational analytical structure for determining the theoretical fair value of European-style options.
Volatility Measure
Measure ⎊ Volatility measure refers to the statistical quantification of price fluctuations in a financial asset over a specific period.