Which one of the following statements related to the implied standard deviation (ISD) is correct?
A) The ISD is an estimate of the historical standard deviation of the underlying security.
B) ISD is equal to (1 − d₁).
C) The ISD estimates the volatility of an option's price over the option's lifespan.
D) The value of ISD is dependent upon both the risk-free rate and the time to option expiration.
E) ISD confirms the observable volatility of the return on the underlying security.

Question

Quizplus · Accepted Answer

The implied standard deviation (ISD) is a measure derived from the Black-Scholes model, which estimates the market's view on the volatility of the underlying asset's returns until the option's expiration. It indeed depends on various factors including the risk-free rate and the time to expiration, making option D correct.

Which One of the Following Statements Related to the Implied