Why do traders use volatility smiles for pricing options? ( )
A. To allow for non-lognormality of the probability distribution of future asset price
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
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What does the shape of the volatility smile reveal about put options on equity? ( )
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
What does the shape of the volatility smile reveal about call options on a currency? ( )
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
The gain from a project is equally likely to have any value between -$0.15 million and +$0.85 million. What is the 99% expected shortfall? ( )
A. $0.145 million
B. $0.14 million
C. $0.13 million
D. $0.10 million
Which of the following is true of the historical simulation method for calculating VaR? ( )
A. It fits historical data on the behavior of variables to a normal distribution
B. It fits historical data on the behavior of variables to a lognormal distribution
C. It assumes that what will happen in the future is a random sample from what has happened in the past
D. It uses Monte Carlo simulation to create random future scenarios
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