On November 21, 2007, Citigrou

On November 21, 2007, Citigroup (C) stock was trading around $30a share. Its January call with exercise price of $27.5 traded for$4. The risk-free rate was 4%. Compute the theoretical optionvalues at standard deviations of returns at (a) 20% (b) 40% (c)60%. Which is the above is closest to its implied volatility? Whatdoes implied volatility reflect? You are recommended to use thecomputer program under docsharing; do not show the computation butdo show your inputs (e.g., T=?) — for this problem only.


40% is closest to implied volatility

Implied Volatility reflects the expectation of market volatilitywhich is different than historical or assumed theoreticalvolatility

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