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Answer: Implied volatilities are not available for assets that do not have actively traded options.
## Explanation **C is correct.** Implied volatility is derived from option prices, which means it can only be calculated for assets that have actively traded options. For assets without liquid options markets, reliable implied volatility data is not available, making this a significant limitation. **Why other options are incorrect:** - **A is incorrect:** Broad volatility indexes like the VIX (S&P 500), VXN (Nasdaq 100), VXD (Dow Jones), and others exist for major asset classes, making volatility forecasting possible for broad market segments. - **B is incorrect:** Implied volatility is actually a forward-looking measure derived from current option prices, while historical volatility is the backward-looking measure. This makes implied volatility more useful for future volatility estimation. - **D is incorrect:** While implied volatilities do differ across maturities (creating the volatility term structure), this is not a weakness but rather reflects market expectations about future volatility patterns and the mean-reverting nature of volatility itself. **Key Insight:** The primary limitation of implied volatility is its dependency on active options markets. Without liquid options trading, implied volatility cannot be reliably calculated, making it unavailable for many assets.
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Which of the following correctly describes a weakness of implied volatility as a predictor of future volatility?
A
Broad indexes of implied volatility do not exist, making forecasting the volatility of broad asset classes difficult.
B
Implied volatility is a backward-looking measure, which limits its usefulness in estimating future volatility.
C
Implied volatilities are not available for assets that do not have actively traded options.
D
In practice, implied volatilities differ for options with different maturities on the same underlying asset, even though theory suggests they should be the same.
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