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

Calculate the present value of a single sum and annuity.

Evaluate investment opportunities by determining present and future values.

Understand the concept of present value and how it is calculated.

Analyze the impact of different discount rates on present value.

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