For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4, after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new option premium would be:
A) $0.036/£.
B) $0.037/£.
C) $0.004/£.
D) $1.54/£.

Question

Quizplus · Accepted Answer

First, we need to calculate the new lambda value:
New lambda = Lambda + (Volatility Increase)/2 = 0.4 + (1/2)*(1/100) = 0.405
Then, we can calculate the new option premium:
New premium = Initial premium * e^(New lambda * Volatility Increase) = 0.033 * e^(0.405 * 1/100) = 0.037/£.

Therefore, the best choice is B, $0.037/£, since it is the calculated new option premium.

For a $150/£ Call Option with an Initial Premium of $0