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.
Learning Objective: Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pricing of options on the underlying asset.
Reference: John Hull, Options, Futures, and Other Derivatives, 11th Edition (New York: Pearson, 2022). Chapter 20 - Volatility Smiles
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A
The implied distribution has a heavier left tail and a less heavy right tail.
B
The implied distribution has a heavier left tail and a heavier right tail.
C
The implied distribution has a less heavy left tail and a heavier right tail.
D
The implied distribution has a less heavy left tail and a less heavy right tail.
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