Comparing implied vols from two quotes
Two market-makers quote the same European call - identical spot, strike, expiry, and interest rate - but dealer A's price is higher than dealer B's. Realized (historical) volatility of the underlying is the same for both. What can you conclude about the implied volatilities the two dealers are quoting?
Show hints (2)+
- Implied vol is backed out of the price; with all else equal, the price differs only through σ.
- Vega is positive - a pricier call means a higher implied vol.
Answer
Reveal answer →Final answer
Dealer A is quoting the higher implied volatility, since option price rises monotonically with vol
Want the full step-by-step worked solution? It's part of Premium - along with a worked solution for every question in the bank.
Asked at: Timed Mental-Math & Sequences, Game-Based Aptitude