Uncertain Parameters: What if You Don't Know the Volatility?
Let us start with an uncomfortable truth. The Black-Scholes equation has three main parameters: volatility, interest rate, and dividend yield. Of these three, not a single one is known with certainty. Sure, you know today’s stock price. You know the expiry date. But the stuff that actually matters for pricing? You are guessing. Chapter 52 of Wilmott’s book takes this discomfort and turns it into a pricing framework.