GARP Financial Risk and Regulation (FRR) Series 2016-FRR Question # 114 Topic 12 Discussion
2016-FRR Exam Topic 12 Question 114 Discussion:
Question #: 114
Topic #: 12
Which one of the following four statements does identify correctly the relationship between the value of an option and perceived exchange rate volatility?
A.
With increases in perceived future foreign exchange volatility, the value of all foreign exchange
B.
As the perceived future foreign exchange volatility decreases, the value of all options increases.
C.
As the perceived future foreign exchange volatility increases, the value of all options increases.
D.
Option values can only change due to the factors related to the demand for specific options
The value of an option is influenced by several factors, including the perceived volatility of the underlying asset, in this case, foreign exchange rates. As the perceived future volatility of foreign exchange rates increases, the value of all options (both calls and puts) also increases. This is because higher volatility increases the likelihood that the option will end up in-the-money, thereby increasing its potential payoff. This relationship is fundamental to option pricing models, such as the Black-Scholes model, which incorporate volatility as a key input.
[References:This explanation aligns with the principles of option valuation discussed in "How Finance Works" document, which details the effects of volatility on option pricing., , ]
Contribute your Thoughts:
Chosen Answer:
This is a voting comment (?). You can switch to a simple comment. It is better to Upvote an existing comment if you don't have anything to add.
Submit