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 or a measure of time decay or intrinsic value. It is also not an estimate of future value given a strike price.

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