Volatility, Trading, Derivatives Market, Quantitative Finance, Finance.
“high order” term on the terminal value of S. To emphasize that, let’s take two cases: σ (annualized volatility) = 10% σ = 20% As we can see, under σ=20% the variation in the terminal value of S is far greater than σ=10%, which, as a result, increases the time-value of options (as our value grows