Description 
Consider a European put option on a stock that pays no dividends and has a volatility of 25%. The option matures on 1 March 2003, has an exercise rate of $60.00, and a market value of $1.82. The riskfree interest rate (on an actual/365 basis) is 5.25%. What is the implied spot of the stock as at 1 March 2002? 


Function Specification 
=oGBS_IS(2, 1.82, "1/3/02", "1/3/03", 60, 0.25, 0.0525, 0.0525) 


Solution 
As there is no closed form solution for implied spot prices, the NewtonRaphson iteration procedure is used to solve for S.


When calculating implied spot prices, the NewtonRaphson iteration procedure uses the strike rate as the initial estimate of the spot price, i.e., x_{0} = $60. The procedure will iterate using more and more precise estimates of the spot price until the difference between the option value derived from the spot price estimate and the given market option value is less than the desired accuracy level (see NewtonRaphson). In this example the desired accuracy level is 9 decimal places.
The continuous equivalent of the actual/365 riskfree interest rate is calculated as follows: Referring to the equations for d_{1} and d_{2} (see model definition), if S = X = 60, vol = 0.25, b = r = 0.0512 (see special cases), and T =1 (365/365 days), d_{1} = 0.3297 and d_{2} = 0.0797.


As iPC = 1 (put), N(d_{1}) is 0.3708 and N(d_{2}) is 0.4682 (see oCumNorm( ) function), the oGBS( ) equation gives the following solution: 



Since $4.4441 is above the market value of the option, $1.82, the spot price of $60 is too low. The oGBS( ) value is therefore computed at a higher spot price, i.e., x_{1} > x_{0}. Referring to the NewtonRaphson iteration procedure, x_{1} is determined as:


Using the same parameter values as above with a new spot estimate of 67.0764, the oGBS( ) equation returns $2.3891. As this value is below the market value of the option the next volatility trial is:


This process continues until the convergence criteria is met, which for this example occurs on the 7th iteration at an implied spot price of $70.00. 
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