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

question 17

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.

---

Definitions:

Priority

Something that is regarded as more important than another and therefore needs to be dealt with first.

General-to-specific

A pattern of organization where information is presented from broad concepts to detailed points, often used in writing and speech.

Problem-solution

A text structure that presents a problem and offers one or more solutions for it.

Complaint Letter

A letter that expresses dissatisfaction with a product or service.