Financial Risk Manager Part 2
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An option pricing analyst has been asked to write a report examining the relationship between option prices and implied volatility curves. The analyst notes that the implied volatility curves of different underlying assets often have different shapes and explains the reasons why this occurs. Which of the following statements can correctly be included in the report?
A
The implied volatility smile commonly seen in equity options is due to the higher probability of a greater than three standard deviation price change than would be expected if prices are lognormally distributed.
B
The implied volatility smile commonly seen in foreign exchange rate options is due to the higher probability of a price change of between one and two standard deviations from the mean than would be expected if prices are lognormally distributed.