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.

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