The price of a European call option is $5 at an implied volatility of 0.25. The vega of the call is 20. If the implied volatility increases to 0.26, what is the new value of a European put option with the same strike and maturity as the call that is currently priced at $6?
A) $0.8
B) $11.2
C) $5.8
D) $6.2

Question

Quizplus · Accepted Answer

The new value of the call option can be calculated using the vega, which measures the option's sensitivity to changes in volatility. With a vega of 20, a 0.01 increase in implied volatility (from 0.25 to 0.26) increases the call option's price by $0.20 (20 * 0.01). Therefore, the new call price is $5.20 ($5 + $0.20). Since the put option has the same strike and maturity, and using put-call parity, the change in the call option's price due to volatility should be mirrored in the put option's price, making the new put price $6.20 ($6 + $0.20).

The Price of a European Call Option Is $5 at an Implied