The Implied Volatility of an Option

question 4

Multiple Choice

The implied volatility of an option

• A) Is the volatility that would have to be plugged into a given option-pricing model to obtain the observed market price.
• B) Can only be calculated using the Black-Scholes model.
• C) Is the volatility implied by the underlying stock price over a given historical period.
• D) Is equal to the volatility that will actually be realized over the life of the option.

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Definitions:

Positive Externality

A benefit received by someone who had nothing to do with the activity that generated the benefit, often leading to an underproduction of the good/service in a free market.

Compensation

The complete sum of financial and non-financial compensation given to a worker by their employer in exchange for the work carried out as needed.

Marginal Seller

A seller who is indifferent about selling at the current market price and might leave the market if prices decrease.

Cost

Cost is the amount of money required to purchase, produce, or maintain something, encompassing both direct expenses and indirect expenditures.