Question 1

In a volatility smile diagram:
i) What is plotted on the horizontal axis? _ _ _ _ _ _
ii) What is plotted on the vertical axis? _ _ _ _ _ _

Accepted Answer

i): Strike price
ii): Implied volatility

Question 2

Indicate whether the tails mentioned below are fatter or thinner than the tails for a lognormal distribution based on the implied volatility.
i) Left tail of foreign currency implied distribution _ _ _ _ _ _
ii) Right tail of foreign currency implied distribution _ _ _ _ _ _
iii) Left tail of stock index implied distribution _ _ _ _ _ _
iv) Right tail of stock index implied distribution _ _ _ _ _ _

Accepted Answer

i) fatter
ii) fatter
iii) fatter
iv) thinner

Question 3

Why is there an inverse relationship between implied volatility and strike price in equity options? _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ ___

Accepted Answer

The increase of a company's equity value reduces leverage and thus its volatility. 'Crashophobia' might be another reason.

Question 4

A volatility smile such as that seen for foreign currency options can be caused by: choose two)

Accepted Answer

A)  The fact that currencies are traded in different countries at different times of the day 
B)  The fact that volatility is not constant 
C)  The fact that the activities of central banks cause occasional jumps in the exchange rate 
D)  The fact that interest rates may be different in the two countries 
A)  The fact that currencies are traded in different countries at different times of the day 
B)  The fact that volatility is not constant 
C)  The fact that the activities of central banks cause occasional jumps in the exchange rate 
D)  The fact that interest rates may be different in the two countries

Question 5

Which of the following is true? choose one)

Accepted Answer

A)  The volatility smile for European puts is the same as that for European calls. 
B)  The volatility smile for European puts is the same as that for American puts. 
C)  The volatility smile for European calls is the same as that for American calls. 
D)  The volatility smile for American puts is the same as that for American calls. 
A)  The volatility smile for European puts is the same as that for European calls. 
B)  The volatility smile for European puts is the same as that for American puts. 
C)  The volatility smile for European calls is the same as that for American calls. 
D)  The volatility smile for American puts is the same as that for American calls.

Question 6

Which of the following is true? choose one)

Accepted Answer

A)  The volatility skew for equities is much more pronounced now than it was in 1987. 
B)  The volatility skew for equities was much more pronounced in 1987 than it is now. 
C)  The volatility skew for equities is consistent with the Black-Scholes model. 
D)  The volatility skew for equities is similar to that for foreign currencies. 
A)  The volatility skew for equities is much more pronounced now than it was in 1987. 
B)  The volatility skew for equities was much more pronounced in 1987 than it is now. 
C)  The volatility skew for equities is consistent with the Black-Scholes model. 
D)  The volatility skew for equities is similar to that for foreign currencies.

In a volatility smile diagram: i) What is plotted on the horizontal axis? _ _ _ _ _ _ ii) What is plotted on the vertical axis? _ _ _ _ _ _

Why is there an inverse relationship between implied volatility and strike price in equity options? _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ ___

A volatility smile such as that seen for foreign currency options can be caused by: choose two)

Which of the following is true? choose one)

Which of the following is true? choose one)

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures 7 Swaps

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Value at Risk

Interest Rate Options

Exotic Options and Other Non-Standard Products

Credit Derivatives

Weather, Energy and Insurance Derivatives

Filters

Exam 19: Volatility Smiles

In a volatility smile diagram: i) What is plotted on the horizontal axis? _ _ _ _ _ _ ii) What is plotted on the vertical axis? _ _ _ _ _ _

Why is there an inverse relationship between implied volatility and strike price in equity options? _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ ___

A volatility smile such as that seen for foreign currency options can be caused by: choose two)

Which of the following is true? choose one)

Which of the following is true? choose one)

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures 7 Swaps

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Value at Risk

Interest Rate Options

Exotic Options and Other Non-Standard Products

Credit Derivatives

Weather, Energy and Insurance Derivatives

Filters