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

---

Definitions:

Plagiarism

The act of using someone else's work or ideas without proper attribution, representing them as one's own.

Grammatical Structure

The arrangement and relationship of words in sentences, governed by rules of syntax and morphology.

Original Source

The initial point of information or the earliest document or media from which information was obtained.

Preparing Report

The process of collecting, analyzing, and organizing information into a structured document for a specific audience and purpose.