- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 38. Valuation of Contingent Claims
- Subject 6. Option Greeks and Implied Volatility

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**CFA Practice Question**

According to the Black-Scholes option valuation formula, which of the following outcomes is likely as a result of an increase in the price volatility of an underlying asset?

A. The premium of both a call option and a put option will increase.

B. The call premium will increase while the put premium will decrease.

C. The put premium will increase while the call premium will decrease.

**Explanation:**The greater the volatility of the underlying asset, the more valuable the option will be, whether it be a call or a put. Options are rights, meaning that the holder will only exercise them if the market moves in her favor. Therefore, the greater the volatility, the more the markets could move in the favor of the option holder. Should the market move in a way that is not in the option holder's favor, the most that could be lost is the premium paid for the option.

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