If the Volatility of the Underlying Asset Decreases, Then The

question 39

Multiple Choice

If the volatility of the underlying asset decreases, then the:

• A) value of the put option will increase, but the value of the call option will decrease.
• B) value of the put option will decrease, but the value of the call option will increase.
• C) value of both the put and call option will increase.
• D) value of both the put and call option will decrease.
• E) value of both the put and call option will remain the same.

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Definitions:

Constant Returns to Scale

The condition where increasing all inputs by a certain factor leads to an increase in output by the same factor, indicating linear scalability in production processes.

Economies of Scale

Cost advantages that enterprises obtain due to scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Specialization of Labor

The division of labor where individuals or groups focus on specific tasks or jobs, increasing efficiency and productivity.

Diminishing Marginal Returns

Diminishing marginal returns occur when the increase in output from adding an additional unit of input decreases, holding all other inputs constant.