"Volatility smile" is referred to as evidence against the Black-Scholes model. Why is that? а. Black-Scholes model generates option premium close to the observed premium if the observed stock volatility is used

"Volatility smile" is referred to as evidence against the Black-Scholes model. Why is that? а. Black-Scholes model generates option premium close to the observed premium if the observed stock volatility is used

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 12QTD

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Question

"Volatility smile" is referred to as evidence against
the Black-Scholes model. Why is that?
а.
Black-Scholes model generates option premium
close to the observed premium if the observed stock
volatility is used
b.
Volatility of returns on one and the same stock, over
one and the same future period of time, can only take
one value

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