For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4,after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new optiom premium would be:
A) $0.036/£.
B) $0.037/£.
C) $0.004/£.
D) $1.54/£.

Question

Quizplus · Accepted Answer

To calculate the new option premium, we need to use the Black-Scholes model and use the following formula:

New option premium = Old option premium x (New volatility / Old volatility)^(Lambda/2)

Plugging in the values:

New option premium = 0.033 x (0.11/0.10)^(0.4/2)

New option premium = 0.037/£

Therefore, the answer is B.

For a $150/£ Call Option with an Initial Premium of $0