Volatility risk is
A)the volatility level for the stock that the option price implies.
B)the risk incurred from unpredictable changes in volatility.
C)the percentage change in the stock call option price divided by the percentage change in the stock price.
D)the sensitivity of the delta to the stock price.
E)A and C.

Question

Quizplus · Accepted Answer

Volatility risk refers to the risk of changes in the volatility of an underlying asset. This risk is incurred due to the unpredictability of the volatility of the asset, which can impact the value of options and other derivative instruments. Option pricing models take volatility into account, and the implied volatility level for a stock can be derived from the option prices. However, this implied volatility may not accurately reflect the actual future volatility of the stock, and unexpected changes in volatility can lead to losses. Therefore, the correct answer is B.

Volatility Risk Is