Question

1 What does the shape of the volatility smile reveal about put options on equity? A. Options close-to-the-money have the lowest implied volatility B. Options deep-in-the-money have a relatively high implied volatility C. Options deep-out-of-the-money have a relatively high implied volatility D. All of the above

2. What does the shape of the volatility smile reveal about call options on a currency? A. Options close-to-the-money have the lowest implied volatility B. Options deep-in-the-money have a relatively high implied volatility C. Options deep-out-of-the-money have a relatively high implied volatility D. All of the above

3. Which of the following causes a volatility smile that is a ``frown``? A. There is a small probability of a large stock price decrease in one week B. There is a small probability of a large stock price increase in one week C. The outcome of a lawsuit (roughly equal chance of being favorable or unfavorable) will create a large movement up or down in one week D. None of the above

4. Which of the following could be a result of “crashophobia”? A. High volatilities for in-the-money calls B. High volatilities for in-the-money puts C. High volatilities for at-the-money calls D. Low volatilities for at-the-money puts

Answer 1