Volatility Smiles in Indian Option's Market - A Study

In pricing Options, among other measures, implied volatility is the critical variable. The present study has tried to compute implied volatility through Newton Raphson technique. The relationship of implied volatility against different exercise prices, often results into a phenomenon, popularly pronounced as “Volatility Smiles”. Considering data for five strikes on individual stock call options for a sample of eight companies during 1st April 2002 and 31st March 2003, the present study observes the above said Volatility Smiles in most cases. The intrinsic value of Option is likely to differ from market price, if such Volatility Smiles are observed. Naturally, it reflects the existence of inefficiency in Indian Options market