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Ch19HullFundamentals7thEd

Ch19HullFundamentals7thEd - Volatility Smiles Chapter 19...

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Fundamentals of Futures and Options Markets, 7th Ed, Ch 19, Copyright © John C. Hull 2010 Volatility Smiles Chapter 19 1
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Fundamentals of Futures and Options Markets, 7th Ed, Ch 19, Copyright © John C. Hull 2010 Volatility Smile A volatility smile shows the variation of the implied volatility with the strike price The volatility smile is the same whether calculated from European call options or European put options. (This follows from put-call parity.) 2
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Fundamentals of Futures and Options Markets, 7th Ed, Ch 19, Copyright © John C. Hull 2010 The Volatility Smile for Foreign Currency Options (Figure 19.1, page 414) Implied Volatility Strike Price 3
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Fundamentals of Futures and Options Markets, 7th Ed, Ch 19, Copyright © John C. Hull 2010 Implied Distribution for Foreign Currency Options Lognormal Implied 4
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Fundamentals of Futures and Options Markets, 7th Ed, Ch 19, Copyright © John C. Hull 2010 Properties of Implied Distribution for Foreign Currency Options Both tails are heavier than the lognormal distribution It is also “more peaked” than the normal distribution 5
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