An implied standard deviation can be computed by using the directly observable Black-Scholes-Merton option pricing variables plus an option price and solving the Black-Scholes-Merton formula for
A) Beta
B) Vega
C) Sigma
D) Rho
E) Gamma

Question

Quizplus · Accepted Answer

The Black-Scholes-Merton formula can be used to calculate the implied standard deviation (sigma) of an option by using the observable variables (stock price, strike price, time to expiration, risk-free interest rate, and option price). Therefore, the correct choice is C) Sigma.

An Implied Standard Deviation Can Be Computed by Using the Directly