An increase in the volatility of the underlying asset,all other things held constant,will ________ the option premium.
A) increase
B) decrease
C) not affect
D) Not enough information is given.

Question

Quizplus · Accepted Answer

Option premium is influenced by various factors, including volatility of the underlying asset. Higher volatility implies the possibility of larger fluctuations in the asset price, which increases the potential for the option to make a profit. As a result, buyers of options are willing to pay more for such options, leading to an increase in their premium. Conversely, if the volatility decreases, the potential for profit decreases as well, leading to a lower premium.

An Increase in the Volatility of the Underlying Asset,all Other