The implied standard deviation used in the Black-Scholes option pricing model is:
A) based on historical performance.
B) a prediction of the volatility of the return on the underlying asset over the life of the option.
C) a measure of the time decay of an option.
D) an estimate of the future value of an option given a strike price e.
E) a measure of the historical intrinsic value of an option.

Question

Quizplus · Accepted Answer

The implied standard deviation used in the Black-Scholes option pricing model is a prediction of the volatility of the return on the underlying asset over the life of the option. It is not based on historical performance, a measure of time decay, an estimate of the future value, or a measure of intrinsic value.

The Implied Standard Deviation Used in the Black-Scholes Option Pricing