If a financial analyst forecasts the volatility for a stock and find that it is
ID: 2806410 • Letter: I
Question
If a financial analyst forecasts the volatility for a stock and find that it is significantly less than that implied by the prices of the puts and calls of the stock, he would conclude that:
puts and calls are underpriced.
the calls are overpriced and the puts are underpriced.
puts and calls are overpriced.
the puts are overpriced and the calls are underpriced.
A.puts and calls are underpriced.
B.the calls are overpriced and the puts are underpriced.
C.puts and calls are overpriced.
D.the puts are overpriced and the calls are underpriced.
Explanation / Answer
a is correct.
Value of option increases as volatility increases. If the analyst find that implied volatility is higher than the forecasted volatility, options are priced with higher volatility when in fact, volatility is lower. It means that the options have higher value than the current reflected price. Hence, they are undervalued.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.