I have confusion when reading credit risk part, which may be a easier task for someone of you.
Original statement : “A dealer has sold a call option on a stock for $35 to an investor. The option is currently worth $46, as quoted in the market. Determine the amount at risk of a credit loss and state which party currently bears the risk.”
Answer:“All of the credit risk is borne by the investor (the owner of the call), because he will look to the dealer (the seller) for the payoff if the owner exercises the option. The current value of the amount at risk is the market price of $46.”
I cannot agree with the author. The rising option price can be solely on increasing volatility of underlying price. The dealer may own nothing to the call holder if the stock price is still smaller than strike price under the contract. Am I correct?
Can someone share relevant thoughts in this case? Thanks.