Which of the following best defines implied volatility?
A)An estimate of the price volatility of an option.
B)The observed relationship of past and present option prices.
C)An estimate of the price volatility of the underlying asset based on observed option prices.
D)The observed relationship of past and present price volatility of the underlying asset.

Question

Quizplus · Accepted Answer

Implied volatility is an estimate of the price volatility of the underlying asset based on observed option prices. This estimate is derived from the options market's prices for a given time frame, where the option contracts' prices reflect investors' expectations of the future movements in the underlying asset's price. Higher implied volatility indicates that investors are expecting more significant changes in the underlying asset's price, and lower implied volatility indicates the opposite.

Which of the Following Best Defines Implied Volatility