Question #33
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 15
Status: Unattempted
Correct Answer: A
Question
Which of the following best describes the implied volatility method for estimated volatility inputs for the Black-Scholes model? Implied volatility is found:
Answer Choices:
A. using the most current stock price data
B. using historical stock price data
C. by solving the Black-Scholes model for the volatility using market values for the stock price, exercise price, interest rate, time until expiration, and option price
Explanation
Implied volatility is found by "backing out" the volatility estimate using the current option
price and all other values in the Black-Scholes model.