A committee of risk management practitioners discusses the difference between pricing deep out-of-the-money call options on FBX stock and pricing deep out-of-the-money call options on the EUR/JPY foreign exchange rate using the Black-Scholes-Merton (BSM) model. The practitioners price these options based on two distinct probability distributions of underlying asset prices at the option expiration date:

• A lognormal probability distribution
• An implied risk-neutral probability distribution obtained from the volatility smile for options of the same maturity

Using the lognormal instead of the implied risk-neutral probability distribution will tend to: