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Jasmine Tang, FRM, is using a simple method called "successive bisection" to determine the implied volatility of a traded option. Jasmine starts with a volatility of zero (this gives a BSM price that is less than the option market price) and a volatility of 30% (this gives a BSM price that is higher than the option market price). She then takes the average of these two volatilities, i.e., 15%, as the new volatility and uses it to compute the option price using the BSM formula. The revised option price is now much closer to the market price but still a bit low. Which of the following statements correctly describes the next step that Jasmine should perform?
A
Replace 30% with 15%, recalculate the averaged volatility using 0% and 15%, use the new average to compute the option price using the BSM formula, and compare it with the market price.
B
Replace 0% with 15%, recalculate the averaged volatility using 30% and 15%, use the new average to compute the option price using the BSM formula, and compare it with the market price.
C
Treat 15% as a rough estimate of the implied volatility, because the revised option price is now much closer to the market price.
D
Shift to a procedure that are more numerically efficient, which involves solving a nonlinear equation.