Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter20:VolatilitySmilesMultipleChoiceTestBank:QuestionswithAnswers1.Whichofthefollowingistrueofavolatilitysmile?A.ImpliedvolatilityisonthehorizontalaxisandstrikepriceisontheverticalaxisB.HistoricalvolatilityisonthehorizontalaxisandstrikepriceisontheverticalaxisC.ImpliedvolatilityisontheverticalaxisandstrikepriceisonthehorizontalaxisD.HistoricalvolatilityisontheverticalaxisandstrikepriceisonthehorizontalaxisAnswer:CAvolatilitysmileshowsimpliedvolatility(whichisontheverticalaxis)asafunctionofthestrikeprice(whichisonthehorizontalaxis).2.Whichofthefollowingistrue?A.VolatilitysmileforEuropeanputsisthesameasforEuropeancallsB.VolatilitysmileforEuropeanputsisthesameasforAmericanputsC.VolatilitysmileforEuropeancallsisthesameasforAmericancallsD.VolatilitysmileforAmericanputsisthesameasforAmericancallsAnswer:APutcallparityshowsthatthevolatilitysmileforEuropeanputsshouldbeexactlythesameasthatforEuropeancalls.ThevolatilitysmileforAmericanoptionsisusuallyclosetobutnotexactlythesameasthatforEuropeanoptions.3.Whichofthefollowingistruewhenthetailsofafutureforeigncurrencydistributionarecomparedwiththoseofalognormaldistributionwiththesamemeanandstandarddeviation?A.ThelefttailandrighttailarethinnerB.ThelefttailisthinnerandtherighttailisfatterC.TherighttailisthinnerandthelefttailisfatterD.BothtailsarefatterAnswer:DBothtailsoftheforeigncurrencydistributionarefatter.ThisleadstoaU-shapedsmile.4.Whichofthefollowingistruewhenthetailsofafuturestockpricedistributionarecomparedwiththoseofalognormaldistributionwiththesamemeanandstandarddeviation?A.ThelefttailandrighttailarethinnerB.ThelefttailisthinnerandtherighttailisfatterC.TherighttailisthinnerandthelefttailisfatterD.BothtailsarefatterAnswer:CThelefttailisfatterandtherighttailisthinner.5.Whichofthefollowingcouldcausethevolatilitysmiletypicallyseenforforeigncurrencyoptions?A.CurrenciesaretradedindifferentcountriesatdifferenttimesofthedayB.CurrenciestendtohavelowvolatilitiesC.Theactivit...
