When volatility increases, the value of a down-and-out put , and the value of a down-and-in put.
A) increases; increases.
B) decreases; increases.
C) may increase or decrease; increases.
D) decreases; may increase or decrease.

Question

Quizplus · Accepted Answer

The value of a down-and-out put may increase or decrease with volatility because higher volatility increases the chance of hitting the barrier, which would make the option worthless. However, it also increases the potential payoff if the barrier is not hit. The value of a down-and-in put increases with volatility because higher volatility increases the chance of the option being activated by hitting the barrier.

When Volatility Increases, the Value of a Down-And-Out Put