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) An decrease in call value and an increase in put value
D) An decrease in call value and a decrease in put value
E) An increase in call value and an increase or decrease in put value

Question

Quizplus · Accepted Answer

An increase in the volatility of the underlying security increases both the value of call options and put options according to the Black-Scholes model. This is because higher volatility increases the potential for movement in the security's price, which can be advantageous for both types of options.

In the Black-Scholes Option Pricing Model, an Increase in Security