Which of the following would represent the most appropriate definition for implied volatility?
A) It is the volatility of the underlying asset's returns implied from the price of a traded option and an option pricing model
B) It is the volatility of the underlying asset's returns implied from a statistical model such as GARCH
C) It is the volatility of an option price implied from a statistical model such as GARCH
D) It is the volatility of an option price implied from the underlying asset volatility

Question

Quizplus · Accepted Answer

Implied volatility is the market's forecast of a likely movement in a security's price and is implied from the price of a traded option using an option pricing model, such as the Black-Scholes model. It is not directly derived from statistical models like GARCH (which is used for estimating the volatility of returns of the underlying asset, not the option) or from the volatility of the option price itself.

Which of the Following Would Represent the Most Appropriate Definition