In the Black-Scholes option pricing model, an increase in a stock's volatility (all else being constant)
A) increases the associated call option value
B) decreases the associated call option value
C) may decrease or increase the option value, depending on the level of interest rates
D) does not change either the put or call option value because put-call parity holds

Question

Quizplus · Accepted Answer

According to the Black-Scholes model, an increase in volatility leads to an increase in the value of call options. This is because an increase in volatility increases the probability of the stock price experiencing large fluctuations, increasing the potential payoff for the call option holder.

In the Black-Scholes Option Pricing Model, an Increase in a Stock's