# Introduction to Bloomberg Terminals

## Lesson 6 - The Volatility Smile

We used the Black Scholes formula to compute option prices.

- Learned how dimensional analysis (thinking about units) helps to recall the Black Scholes Formula
- Implemented the Black Scholes Formula in Excel
- Used Excel's Solver to compute implied volatilities
- Observed the volatility smile and saw that it became less cheerful for longer maturities.

**Bloomberg functions used**

**OMON **- Options Monitor to see prices for exchange traded options
**GV **- View historic volatility and implied volatility
**DES** - A description of a security. In particular we found out that exchange traded options on Google are American.
**BQ** - Bloomberg Quote. This gives a summary of a security. For example one can read off that Google does not pay dividends.

### Excel functions used

**NORMDIST** - Compute the pdf or cumulative distribution function of the normal distribution
**SQRT** - Compute square roots
**Solver** - Solve equations and optimization problems

### Using Solver

- Install it by selecting the "Office button" in the top left corner of Excel. Select Excel Options, Add Ins, Manage Excel Add Ins, Go, Select Solver and press OK.
- Create a goal that you want to achieve. This should be a cell in your spread sheet that you want to attain a particular value (either a fixed value, a max or a minimum). One way to create a goal is to create an "Error" cell containing the difference between the desired value for a field and the current value. By creating a single cell containing a sum of squared errors, you can create a single goal that combines lots of smaller goals.
- Ask Solver to find out how to achieve your goal by varying other cells in the spreadsheet. You need to tell it your goal (which it calls the target cell) and which cells it is allowed to change to achieve this goal.
- Solver will now compute the necessary changes to the spreadsheet.