Question

Volatility smile:

A. implies that we should use different option pricing models to find the implied volatility from options that are the same but plots the implied volatility of options that are alike in all aspects but differ in their moneyness

B. None of these are correct

C. means that implied volatility must be the same for all options expiring on the same date regardless of strike price

Answer 1

ANSWER

c) MEANS THAT IMPLIED VOLATILITY MUST BE THE SAME FOR ALL OPTIONS EXPIRING ON THE SAME DATE REGARDLESS OF STRIKE PRICE.

VOLATILITY SMILE

A volatility smile is a graphical representation that results from plotting the strike price and implied volatility of a group of options with the same underlying asset and expiration date. Here we are using the option of the same asset and it will plotted in the graph. Then we get a shape like smiling mouth. This is why it is known as volatility smile. Volatility smiles are implied volatility patternswhich arise from pricing financial options.Implied volatility would be the same for all options expiring on the same date with the same underlying asset regardless of the strike price.

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