Model pricing error

[DyaM]

Hello. I have a little problem, and I hope that someone could help me... I have to find the pricing error for Black Scholse model, and to implement a program for this... but I think the way I start is wrong. So, for each day, I get a volatility by minimizing the sum of the errors squares given by the BS model. And, so, for each day in the sample I have an implied volatility...let'e say I have a vector of volatilities. The problem is afterwards...I have to find at which extent market price stray from BS prices...So, I have to calculate the error between between BS price and market price. So, how to I do? I take again the BS formula and calculate it for each daily implied volatility I have previously found (the vector of volatilities), and then find the difference between that BS option value and the option value every day on the market? I don't understand how to match the two prices and what market price of an option to use? And I also have to implement an program for this...Do I have to do a loop for this? Inside the loop I get the every day volatility and outside the loop I get the error? I don't quite know how to proceed..Sorry for this long messege..I hope someone could help me...Thank you very much in advance!!

 

[Yike Lu]

It's meaningless to calculate an IV then ask how far market prices stray from BS values. To calculate a BS price, you need a separate source of volatility measurement. You need to ask whoever gave you the problem to clarify.