Question

A bank uses Black's model to price European bond options. Suppose that an implied price volatility for a 5 -year option on a bond maturing in 10 years is used to price a 9-year option on the bond. Would you expect the resultant price to be too high or too low? Explain your answer.

   A bank uses Black's model to price European bond options. Suppose that an implied price volatility for a 5 -year option on a bond maturing in 10 years is used to price a 9-year option on the bond. Would you expect the resultant price to be too high or too low? Explain your answer.
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Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 29, Problem 6 ↓

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Implied volatility is the estimated volatility of a security's price based on the market price of its options. It is derived from the option's price using an option pricing model, such as Black's model. In this case, the bank is using the implied price volatility  Show more…

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A bank uses Black's model to price European bond options. Suppose that an implied price volatility for a 5 -year option on a bond maturing in 10 years is used to price a 9-year option on the bond. Would you expect the resultant price to be too high or too low? Explain your answer.
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