Implied Volatility in Option Pricing

Medium Option Valuation Implied Volatility

Consider a European call option with a strike price of $50, expiring in 3 months. The current price of the underlying asset is $55, and the risk-free interest rate is 2% per annum. Market quotes for European call options with similar characteristics show varying premiums. An analyst uses the Black-Scholes model to derive the implied volatility of the call option based on the market price.

If the market price of the call option is observed at $7.50, what can be inferred about the implied volatility derived from the Black-Scholes model?

The implied volatility will be low, indicating low expected future volatility of the underlying asset.

The implied volatility will be high, reflecting greater uncertainty about the future price of the underlying asset.

The implied volatility is irrelevant as it does not affect option pricing.

Hint

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