To determine a stock's implicit volatility involves
A) using a 10-year history of Value-Line industry data.
B) solve for the logarithm of the Wall Street Journal daily stock yields.
C) taking the range of the option price divided by two.
D) solving the Black-Scholes for the standard deviation.

Question

Quizplus · Accepted Answer

Implicit volatility is determined by solving the Black-Scholes model for the standard deviation. The Black-Scholes model takes into account factors such as strike price, time to expiration, current stock price, risk-free rate, and dividend yield in order to calculate the fair price of an options contract. By solving for the standard deviation component in the model, one can determine the level of volatility that is implied by the options prices in the market.

To Determine a Stock's Implicit Volatility Involves