Consider Digital (Cash-Or-Nothing) Call Options

question 41

Multiple Choice

Consider digital (cash-or-nothing) call options. When volatility increases, the holders of out-of-the-money options generally , and the holders of in-the-money options generally

• A) benefit; benefit.
• B) benefit; lose.
• C) lose; benefit.
• D) lose; lose.

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Definitions:

Marginal Cost Curve

A graphical representation showing how the cost of producing one additional item changes with increased production.

Average Variable Cost Curve

A curve showing the average variable costs (costs that change with output) per unit of output over different levels of production.

Average Fixed Costs

The fixed costs of production divided by the quantity of output produced, illustrating how fixed costs dilute with increased output.

Average Total Costs

The cost per unit produced calculated by dividing the total cost of production by the quantity of output.