If the Stock "Gaps" or "Jumps," an Implied Volatility Smile

question 20

Multiple Choice

If the stock "gaps" or "jumps," an implied volatility smile results.Which of the following reasons explains why this happens?

• A)Holding the variance constant,jumps always increase the kurtosis of the distribution.
• B)Holding the variance constant,jumps always increase the skewness of the distribution.
• C)Holding the variance constant,jumps always increase the risk aversion of investors who buy options.
• D)All of the above.

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Definitions:

Average Variable Cost

The variable cost per unit of output, calculated by dividing total variable costs by the quantity of output produced.

Output

The quantity of goods or services produced in a given time period by a firm, industry, or country.

Total Variable Cost

The sum of all costs that vary with output level, including expenses such as labor and raw materials, but not fixed costs like rent.

Output

The total amount of goods or services produced by an individual, firm, or country.