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

Analyze the impact of government fiscal policies on interest rates and investment.

Describe the market mechanics and participants in the stock and bond markets.

Understand the effects of tax policies on investment decisions and interest rates.

Evaluate the implications of corporate actions and government regulations on financial markets.

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