A RISK MANAGER IS IN THE PROCESS OF VALUING SEVERAL EUROPEAN OPTIO...
15.
A risk manager is in the process of valuing several European option positions on a non-dividend-paying stock
XYZ that is currently priced at GBP 30. The implied volatility skew, estimated using the Black-Scholes-Merton
model and the current prices of actively traded European-style options on stock XYZ at various strike prices,
is shown below:
Im
p
li
e
d
V
o
la
ti
li
ty
Strike Price (GBP)
Assuming that the implied volatility at GBP 30 is used to conduct the valuation, which of the following long
positions will be undervalued?
a.
An out-of-the-money call
b.
An in-the-money call
c.
An at-the-money put
d.
An in-the-money put