Answer: An out-of-the-money call

## Explanation When using a single implied volatility (GBP 30) for valuation across different strike prices, the **volatility smile** effect is ignored. The volatility smile typically shows that: - **Out-of-the-money (OTM) options** have higher implied volatilities than at-the-money options - **In-the-money (ITM) options** have lower implied volatilities than at-the-money options Using a single volatility of GBP 30 (which is likely the at-the-money volatility) will: - **Undervalue OTM options** because their actual implied volatilities are higher than GBP 30 - **Overvalue ITM options** because their actual implied volatilities are lower than GBP 30 Therefore, an **out-of-the-money call (Option A)** will be undervalued when using the GBP 30 implied volatility, as the market typically prices OTM options with higher implied volatility due to the volatility smile effect. **Key Points:** - Volatility smile causes different implied volatilities for different strike prices - OTM options have higher implied volatility than ATM options - Using a single ATM volatility undervalues OTM options - ITM options would be overvalued in this scenario

Author: LeetQuiz .