2016-FRR Exam Dumps | Which one of the following statements is an advantage of using implied volatility as an input when calculating

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Question 94

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Question 94/145

Which one of the following statements is an advantage of using implied volatility as an input when calculating VaR?

A. Implied volatility assumes volatilities are constant which makes it easy to implement in models.

B. Current market data is used to determine implied volatilities, which makes them forward looking measures

C. Implied volatilities are better at predicting actual volatilities

D. Loss probabilities from the standard normal distribution are used to compute implied volatilities, which makes it easy to compute the.

Correct Answer: B

Implied volatility is an estimate of the volatility of a security's price derived from market prices of options.
One of the key advantages of using implied volatility in VaR calculations is its forward-looking nature.
* Forward-Looking: Implied volatility reflects the market's expectations of future volatility. It is derived from the prices of options, which incorporate the collective market view on future price fluctuations.
* Current Market Data: Since implied volatility is based on current market prices, it adjusts to new information more quickly than historical volatility measures, making it a more timely indicator of risk.
Using implied volatility can provide a more accurate and responsive measure of risk, especially in dynamic market conditions.
References
* How Finance Works.pdf, p. 232

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