Which of the following statements about the volatility is not true?
A)the implied volatility often differs across options with different exercise prices
B)the implied volatility equals the historical volatility if the option is correctly priced
C)the implied volatility is determined by trial and error
D)the implied volatility is nearly linearly related to the option price
E)none of the above

Question

Quizplus · Accepted Answer

Implied volatility is the market's expectation of how volatile the underlying asset will be in the future. It is determined by trial and error, meaning that it is found by inputting different values into an options pricing model until the model's output matches the market price of the option. Therefore, there is no guarantee that implied volatility will equal historical volatility, and option pricing models often use a range of inputs to determine implied volatility. Choice A is true because the implied volatility can differ across options with different exercise prices due to varying market expectations for volatility. Choice C is true because implied volatility is determined by trial and error in options pricing models. Choice D is true because there is often a nearly linear relationship between implied volatility and option price, with higher implied volatility leading to higher option prices.

Which of the Following Statements About the Volatility Is Not