Explanation

Out-of-the-money currency options typically exhibit a volatility smirk pattern. This phenomenon is characterized by:

• Higher implied volatility for out-of-the-money options compared to at-the-money options
• An asymmetric volatility curve that "smirks" or skews toward one direction

In currency markets, this smirk pattern often reflects:

1. Market expectations about potential large currency movements in one direction
2. Risk aversion among market participants who are willing to pay higher premiums for protection against adverse currency moves
3. Supply and demand imbalances for specific strike prices

This is different from:

• Volatility smile: Symmetric pattern where both in-the-money and out-of-the-money options have higher implied volatility than at-the-money options
• Volatility frown: Rare pattern where at-the-money options have the highest implied volatility

The smirk pattern is particularly common in currency options due to the unique characteristics of foreign exchange markets, including central bank interventions, political risk, and carry trade dynamics.