Financial Risk Manager Part 2

Get started today

Ultimate access to all questions.

Explanation:

B is correct. For a foreign currency option, the implied distribution gives a relatively high price for the option. The implied volatility is relatively low for at-the-money options, but it becomes higher as the option moves either in-the-money or out-of-the-money. Thus, the implied distribution has heavier tails than the lognormal distribution.

Explanation:

Comments (0)

No comments yet.

Question A risk analyst at an investment bank is examining the assumptions the bank uses in its foreign exchange (FX) option pricing model. Currently, the implied volatility in a particular FX pair is relatively low if an option is at-the-money and becomes progressively higher as the option moves either more in-the-money or more out-of-the-money. How does the distribution of option prices on this FX pair implied by the Black-Scholes-Merton model compare to a lognormal distribution with the same mean and standard deviation?

Exam-Like

Community

UAnonymous

Last updated: July 5, 2026 at 07:28

The implied distribution has a heavier left tail and a less heavy right tail.

The implied distribution has a heavier left tail and a heavier right tail.

The implied distribution has a less heavy left tail and a heavier right tail.

The implied distribution has a less heavy left tail and a less heavy right tail.