A) The left tail and right tail are thinner
B) The left tail is thinner and the right tail is fatter
C) The right tail is thinner and the left tail is fatter
D) Both tails are fatter
F) A) and C)
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A) 19.24%
B) 19.52%
C) 20.48%
D) 19.96%
F) All of the above
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B
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A) Currencies are traded in different countries at different times of the day
B) Currencies tend to have low volatilities
C) The activities of central banks causes occasional jumps in the exchange rate
D) Interest rates may be different in the two countries
F) All of the above
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A) Implied volatility, time to maturity, and strike price
B) Implied volatility, historical volatility, and time to maturity
C) Historical volatility, strike price, and time to maturity
D) None of the above
F) A) and C)
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A) There is a small probability of a large stock price decrease in one week
B) There is a small probability of a large stock price increase in one week
C) The outcome of a lawsuit (roughly equal chance of being favorable or unfavorable) will create a large movement up or down in one week
D) None of the above
F) B) and D)
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A) Out-of-the money and in-the-money prices would be too high
B) Out-of-the money and in-the-money prices would be too low
C) Out-of-the-money option prices would be too high and in-the-money option prices would be too low
D) Out-of-the-money option prices would be too low and in-the-money option prices would be too high
F) None of the above
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B
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A) Implied volatility is on the horizontal axis and strike price is on the vertical axis
B) Historical volatility is on the horizontal axis and strike price is on the vertical axis
C) Implied volatility is on the vertical axis and strike price is on the horizontal axis
D) Historical volatility is on the vertical axis and strike price is on the horizontal axis
F) B) and C)
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C
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A) High volatilities for in-the-money calls
B) High volatilities for in-the-money puts
C) High volatilities for at-the-money calls
D) Low volatilities for at-the-money puts
F) B) and C)
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A) The volatility smile for currency options tends to become more pronounced
B) The volatility smile for currency options tends to become less pronounced
C) The volatility smile for currency options first becomes less pronounced and then becomes more pronounced
D) The volatility smile for currency options remains approximately the same
F) C) and D)
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A) The volatility skew for equities is much more pronounced now than it was in 1985.
B) The volatility skew for equities has a positive gradient
C) The volatility skew for equities is consistent with the Black-Scholes-Merton model.
D) The volatility skew for equities is similar to that for foreign currencies.
F) A) and B)
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A) If they have the same strike price, they have the same implied volatility
B) If they have the same time to maturity, they have the same implied volatility
C) If they have the same strike price and time to maturity, they have the same implied volatility
D) None of the above
F) A) and C)
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A) Options close-to-the-money have the lowest implied volatility
B) Options deep-in-the-money have a relatively high implied volatility
C) Options deep-out-of-the-money have a relatively high implied volatility
D) All of the above
F) A) and C)
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A) Out-of-the money and in-the-money prices would be too high
B) Out-of-the money and in-the-money prices would be too low
C) Out-of-the-money option prices would be too high and in-the-money option prices would be too low
D) Out-of-the-money option prices would be too low and in-the-money option prices would be too high
F) A) and B)
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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
F) None of the above
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A) The left tail and right tail are thinner
B) The left tail is thinner and the right tail is fatter
C) The right tail is thinner and the left tail is fatter
D) Both tails are fatter
F) None of the above
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A) Volatility smile for European puts is the same as for European calls
B) Volatility smile for European puts is the same as for American puts
C) Volatility smile for European calls is the same as for American calls
D) Volatility smile for American puts is the same as for American calls
F) B) and C)
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A) A volatility surface provides more information than a single volatility smile
B) A volatility surface is used to determine the implied volatility of an option that does not trade actively
C) A volatility surface can be determined from a single volatility smile using interpolation
D) A volatility surface incorporates information about options with different maturity dates
F) A) and D)
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A) Both small and large exchange rate moves are more likely than with the normal distribution
B) Small exchange rate moves are less likely and large exchange rate moves are more likely than with the normal distribution
C) Large exchange rate moves are less likely and small exchange rate moves are more likely than with the normal distribution
D) Both small and large exchange rate moves are less likely than with the normal distribution
F) B) and C)
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A) Options close-to-the-money have the lowest implied volatility
B) Options deep-in-the-money have a relatively high implied volatility
C) Options deep-out-of-the-money have a relatively high implied volatility
D) All of the above
F) A) and B)
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A) Four standard deviation daily moves in an exchange rate happen less frequently than they would do if changes were normally distributed
B) Four standard deviation daily movements in an exchange rate happen more frequently than three standard deviation moves in the exchange rate
C) The frequency of six standard deviation daily movements in an exchange rate is about once every 100 years
D) None of the above
F) A) and C)
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