In
financial mathematics, the
implied volatility of an
option contract is that value of the
volatility of the underlying instrument which, when input in an
option pricing model (such as
Black–Scholes) will return a theoretical value equal to the current market price of the option. A non-option
financial instrument that has embedded optionality, such as an
interest rate cap, can also have an implied volatility. Implied volatility, a forward-looking and subjective measure, differs from historical volatility because the latter is calculated from known past returns of a
security.