FRM part II-market Vol smile

anbu.edu
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FRM part II-market Vol smile

Postby anbu.edu » Sun Mar 02, 2014 11:54 am

In currency option the Volatility become less pronounced as maturity of the option increases- Why is that
Can anyone explain

Source GARP core reading

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shreyas
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FRM part II-market Vol smile

Postby shreyas » Fri Mar 07, 2014 11:54 am

Implied volatilities for shorter tenor option swing more compared to longer tenor options since, more liquidity is present in shorter tenor options which suggests better market pricing in shorter tenor options.This is based market demand supply conditions which is not the case for longer tenor options.
Correspondingly, plot of volatility of volatility is a decreasing function of time.

pradeeppdy
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FRM part II-market Vol smile

Postby pradeeppdy » Tue Apr 01, 2014 11:29 am

Time value is, as above, the difference between option value and intrinsic value, i.e.
Time Value = Option Value - Intrinsic Value.
More specifically, TV reflects the probability that the option will gain in IV — become (more) profitable to exercise before it expires.


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