Implied Volatility:

The implied volatility in the options market is the volatility implied by the market price of the option based on an option pricing model. The Black Scholes model is the generaly accepted model for pricing options.

In the OTC options market, quotations are given as volatility. A quoted volatility in the market is the volatility for a specific tenor and moneyness. For different moneyness levels the implied volatility of the options change. This causes the need to quote different volatilities for each strike level which is praticaly not possible.

In the market some standart moneyness levels are accepted as benchmark and these levels are the most traded and liquid levels. The most liquid moneyness levels are at the money, 25 delta out of the money and 25 delta in the money levels for the currency options. If a demand comes to the market maker to price an option with 15 delta moneyness level, the market maker should use a model to interpolate the volatility of the 15 delta moneyness level by using the standart quotations in the market. (At the money, 25 delta in the money, 25 delta out of the money)

Derivative Engines Real Time option pricing calculators get these standart quotations from various brokers and interpolate any moneyness level volatility by using Vanna Volga Method.
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