The graph shows the price profile (option price vs. strike, in the Black-Scholes model) of 6- month options on XYZ, for two different implied volatilities (IVs): 22% and 40%. Recall that 22% was the implied volatility where the $50-strike put was priced, and 40% was the implied volatility where the $30-strike put was priced. 

At what value of the strike is the price difference (for the two different implied volatilities)

the biggest? Any thoughts on this?

  

Transcribed Image Text:

$18 $16 $14 $12 $10 $8 $6 $4 $2 $0 PUT PRICE (6-MONTH EXPIRY) vs STRIKE V A $30 $32 $34 $36 $38 $40 $42 $44 $46 $48 $50 $52 $54 $56 $58 $60 $62 $64 PUT PRICE @ 22% IV PUT PRICE @ 40% IV $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 PUT PRICE (6-MONTH EXPIRY) vs STRIKE V A $30 $32 $34 $36 $38 $40 $42 $44 $46 $48 $50 $52 $54 $56 $58 $60 $62 $64 PUT PRICE @ 22% IV PUT PRICE @ 40% IV

Answer rating: 100% (QA)

Based on the information provided the price difference between options priced with 22 and 40 implied ... View the full answer