In the Black-Scholes option pricing model, an increase in security volatility ( $\sigma$) will cause
A) an increase in call value and an increase in put value.
B) an increase in call value and a decrease in put value.
C) a decrease in call value and an increase in put value.
D) a decrease in call value and a decrease in put value.
E) an increase in call value and an increase or decrease in put value.

Question

Quizplus · Accepted Answer

In the Black-Scholes model, an increase in the volatility of the underlying security increases the value of both call and put options. This is because higher volatility increases the potential for movement in the security's price, which increases the probability of the options ending in the money.

In the Black-Scholes Option Pricing Model, an Increase in Security σ\sigmaσ

In the Black-Scholes Option Pricing Model, an Increase in Security $\sigma$