Consider a 6-month expiration European call option with exercise price $105. The underlying stock sells for $100 a share and pays no dividends. The risk-free rate is 5%. (4 marks) We use the following spreadsheet to calculate the implied volatility.

INPUTS		OUTPUTS
Standard deviation (annual)	0.3213	d1	0.0089
Expiration (in years)	0.5	d2	-0.2183
Risk-free rate (annual)	0.05	N(d1)	0.5036
Stock price	100	N(d2)	0.4136
Exercise price	105	B/S call value	8.0000
Dividend yield (annual)	0	B/S put value	10.4076

On the left of the template are the inputs: standard deviation, expiration, risk-free rate, stock spot price, exercise price and dividend yield. On the right of the template are the outputs: d1, d2, N(d1), N(d2), Black-Scholes call value and put value. We use trial and error method by taking repeated, varied attempts of standard deviation until successfully obtain a Black-Scholes call value being equal to $8. Then the corresponding standard deviation 0.3213 is the implied volatility at the call option price $8. (a) Will the implied volatility increase or decrease if the option is selling at $9? (1 mark)

(b) Will the implied volatility increase or decrease if the option price is unchanged at $8, but option expiration is sooner, says, only 4 months? (1 mark)

(c) Will the implied volatility increase or decrease if the option price is unchanged at $8, but the exercise price is lower, say, only $100? (1 mark)

(d) Will the implied volatility increase or decrease if the option price is unchanged at $8, but the stock price is lower, say, only $98? (1 mark)