An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium.
A) increase
B) decrease
C) increase or decrease
D) Not enough information is given.

Question

Quizplus · Accepted Answer

An increase in volatility means there is a higher likelihood of the underlying asset moving significantly in price, which increases the potential for the option to be exercised and makes the option more valuable. Therefore, the option premium will increase.

An Increase in the Volatility of the Underlying Asset, All