Implied Volatility and Call Option Pricing

Very Hard Option Valuation Implied Volatility

In the context of European call options, implied volatility (IV) is a critical parameter derived from the Black-Scholes pricing model. It reflects the market's forecast of the underlying asset's volatility over the life of the option.

Consider a European call option with a strike price of $50 and current underlying asset price of $50. The option is quoted with an IV of 20% and a risk-free rate of 5%. You are tasked with analyzing how a change in the IV impacts the option's price, especially considering the interplay of time to expiration and the underlying asset's price movement.

Which of the following statements about the impact of implied volatility on the option's price is most accurate?

If the implied volatility increases, the price of the call option will definitely increase, regardless of other factors.

An increase in implied volatility affects the option's price due to the convex nature of the option's value as volatility rises.

Changes in implied volatility do not affect the price of the call option if the underlying asset is at-the-money.

Hint

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