Why Do Traders Use Volatility Smiles for Pricing Options

question 4

Multiple Choice

Why do traders use volatility smiles for pricing options?

• A) To allow for non-lognormality of the probability distribution of future asset price
• B) Because it is consistent with recent market moves
• C) As a tool to reflect their views about extreme market moves
• D) Because extreme market moves are always more likely than Black-Scholes-Merton assumes

Understand the concept of zero-coupon bonds and calculate their purchase price and yield.

Comprehend and apply the Fisher formula to relate nominal rates, real rates, and inflation.

Evaluate the degree of interest rate risk associated with bonds of different maturities and coupon rates.

Understand and calculate the real rate of return on bonds, considering inflation.

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Definitions:

Customer-Relationship Model

A business strategy that focuses on maintaining engaging, loyal relationships with customers to foster brand loyalty and repeat business.

Consultative Selling

A sales technique where the salesperson acts as an advisor, understanding client needs and recommending solutions accordingly.

Close-Ended

Pertaining to questions or options that limit responses to a set of choices, offering no opportunity for open-ended answers.

Sales Call Planning

The process of organizing and preparing objectives, strategies, and key points to discuss during a sales call to maximize the likelihood of a successful outcome.