Assume the standard deviation of the returns on ABC stock increases.The effect of this change on the value of the call options on ABC stock is measured by which one of the following?
A)theta.
B)vega.
C)rho.
D)delta.
E)gamma.

Question

Quizplus · Accepted Answer

Vega measures the sensitivity of an option price to changes in volatility. If the standard deviation of the returns on ABC stock increases, it indicates an increase in volatility, which in turn has a positive effect on the price of call options. Therefore, the best choice to measure the effect of this change is vega. Theta measures the time decay of an option, rho measures the sensitivity of an option price to changes in interest rates, delta measures the sensitivity of an option price to changes in the underlying price, and gamma measures the sensitivity of delta to changes in the underlying price. None of these metrics directly measure the effect of changes in volatility on option price.

Assume the Standard Deviation of the Returns on ABC Stock