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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Historic Volatility and Implied Volatility

Definition

Volatility is the standard deviation, generally annualised, of the continuously compounded rate of return on an instrument.

Historic volatility is the actual volatility observed using historic data over a particular period.

Implied volatility is the current measure of volatility being used by a particular dealer or by the market in general to calculate premiums, i.e. it is the volatility implied by an option premium.

How are they used?

Volatility is used as a measure of how much the price of something fluctuates. This is significant in valuing options, because the more volatile the price, the greater the probable profit that will be available at some time to the buyer of an option.

It is ...

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