FMP

anbu.edu
Finance Junkie
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FMP

Postby anbu.edu » Mon Oct 07, 2013 11:45 am

With all other things being equal, a risk monitoring system that assumes constant volatility for equity returns will understate the implied volatility for which of the following positions by the largest amount:
Choose one answer.
Choose one answer.
a. Long position in a deep in-the-money call Correct
b. Short position in an at-the-money call Incorrect
c. Short position in a deep in-the-money call Incorrect
d. Long position in an at-the-money call Incorrect
Can anybody tell me were can i find the concept explained about vol smile

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

FMP

Postby pradeeppdy » Thu Oct 10, 2013 7:21 am

A plot of the implied volatility of an option as a function of its strike price demonstrates a pattern known as the volatility smile or volatility skew.
The implied volatility decreases as the strike price increases. Thus, all else equal, a risk monitoring system which assumes constant volatility for equity returns will understate the implied volatility for a long position in a deep-in-the-money call.


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