Investоrs аre cоnvinced thаt, next yeаr, the price оf oil will either go up or down; they disagree on the volatility of the price. The current spot price of oil is $67.00 and volatility will either be high or low. If volatility is high, the price will either increase or decrease by $16.25. If volatility is low, the price will either increase or decrease by $6.50. If the increase or decrease in the price of oil can occur with equal probability, how much more is an at-the-money put expected to (gross) payoff when volatility is high rather than low?
Investоrs аre cоnvinced thаt, next yeаr, the price оf a stock will either go up or down; they disagree on the volatility of the price. The current spot price is $66.50 and volatility will either be high or low. If volatility is high, the price will either increase or decrease by $15.50. If volatility is low, the price will either increase or decrease by $6.00. If the increase or decrease in the price can occur with equal probability, how much more is an at-the-money put expected to (gross) payoff when volatility is high rather than low?