Volatility smile meaning
Black-Scholes assumes constant volatility, yet implied vols differ across strikes. What is this pattern called, and what does it imply about the true return distribution?
Show hints (2)+
- Why would out-of-the-money options trade at higher implied vols?
- Extreme moves are more likely than lognormal predicts.
Answer
Reveal answer →Final answer
Volatility smile/skew; the true distribution has fatter tails than lognormal
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