In the Black-Scholes model,the symbol "σ" is used to represent the standard deviation of the:
A)option premium on a call with a specified exercise price.
B)rate of return on the underlying asset.
C)volatility of the risk-free rate of return.
D)rate of return on a risk-free asset.
E)option premium on a put with a specified exercise price.

Question

Quizplus · Accepted Answer

In the Black-Scholes model, σ represents the standard deviation of the rate of return on the underlying asset. This variable is used to calculate the volatility of the asset, which is a crucial input in determining the price of a European-style call or put option. The higher the volatility, the greater the potential for large price swings, and thus a higher option premium.

In the Black-Scholes Model,the Symbol "σ" Is Used to Represent