Question #1
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 1
Status: Unattempted
Correct Answer: A
Question
Which of the following statements regarding an option's price is CORRECT? An option's price is:
Answer Choices:
A. an increasing function of the underlying asset's volatility
B. a decreasing function of the underlying asset's volatility
C. a decreasing function of the underlying asset's volatility when it has a long time remaining until expiration and an increasing function of its volatility if the option is close to expiration
Explanation
Since an option has limited risk but significant upside potential, its value always increases
when the volatility of the underlying asset increases.