The Black-Scholes-Merton Model's Implied Volatility Is

question 6

Multiple Choice

The Black-Scholes-Merton model's implied volatility is:

• A) the market's estimate of the future value of the stock's random volatility over the option's life
• B) the volatility that equates the BSM model price to the market price,if all other inputs are known
• C) the market's estimate of the future value of the stock's random volatility over an infinitesimal time interval
• D) the market's estimate of the stock's random volatility over an infinitesimal time interval beginning when the option matures
• E) another name for estimating the volatility using historical stock price data

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Definitions:

Opportunity Cost

The value of the best alternative forgone when a choice is made between different options.

Tax Rate

The percentage at which an individual or corporation is taxed by the government on income or profits.

Market Value

The present rate at which a service or asset is available for purchase or sale on the open market.

Straight Line

A depreciation method where an asset loses value evenly across its useful life.