6 nov mock test

AMITAG1990
Finance Junkie
Posts: 89
Joined: Sat Sep 22, 2012 12:35 pm

6 nov mock test

Postby AMITAG1990 » Fri Nov 09, 2012 4:46 pm

Suppose there are two call options on the same stock which is trading at $40. The options are having strike prices of $40 (C40) and $45(C45). Suppose the volatility of the stock increases by 0.001. How will be the increase in the values of the two call options?
Choose one answer.
a. Value of C_40 will increase more than the increase in the value of C_45. Incorrect
b. Value of C_40 will increase less than the increase in the value of C_45. Incorrect
c. Value of C_40 will increase by the same amount as the increase in the value of C_45. Correct
d. It cannot be determined whose value will increase more. Incorrect

As vega is maximum for at the money So answer should be a. Please explain its logic.

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balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Re: 6 nov mock test

Postby balajismz » Fri Nov 09, 2012 5:02 pm

Yes, the answer should be option A.

Balaji


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