Question

In the Black-Scholes option pricing model, an increase in security volatility (s) 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

Answer 1

In the Black-Scholes option pricing model, an increase in security volatility will cause a decrease in put value and an increase in call value.

Step-by-step explanation:

In the Black-Scholes option pricing model, an increase in security volatility (s) will cause an increase in call value and a decrease in put value (option B). When security volatility increases, it leads to a higher probability of the underlying asset reaching the strike price, which benefits a call option. However, for a put option, the higher volatility increases the chances of the underlying asset falling below the strike price, reducing its value.