Consider the case where the left tail of the implied distribution is thinner than that of the log-normal distribution and the right tail of the implied distribution is fatter than that of the log-normal distribution with the same mean and standard deviation. Which of the following statements is correct? A) The implied volatility of a deep out-of-the money put is greater than the one obtained from the Black-Scholes price. B) The implied volatility decreases as the strike price increases. C) The implied volatility of a deep out-of-the money call is smaller than the one obtained from the Black-Scholes price. D) The implied volatility increases as the strike price increases.
Consider the case where the left tail of the implied distribution is thinner than that of the log-
|
A) The implied volatility of a deep out-of-the money put is greater than the one obtained from the Black-Scholes price. |
||
|
B) The implied volatility decreases as the strike price increases. |
||
|
C) The implied volatility of a deep out-of-the money call is smaller than the one obtained from the Black-Scholes price. |
||
|
D) The implied volatility increases as the strike price increases. |
Please explain and justify your choice. In your answer, discuss the shape of the relation of implied volatility to the strike price and explain how this is obtained.
Step by step
Solved in 2 steps
