Question

What volatility smile is likely to be caused by jumps in the underlying asset price? Is the pattern likely to be more pronounced for a 2-year option than for a 3-month option?

   What volatility smile is likely to be caused by jumps in the underlying asset price? Is the pattern likely to be more pronounced for a 2-year option than for a 3-month option?

Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 20, Problem 3

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These jumps can be caused by various factors such as news events, earnings announcements, or market shocks. In terms of the volatility smile, jumps in the underlying asset price are likely to result in a more pronounced smile pattern. The volatility smile refers Show more…

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What volatility smile is likely to be caused by jumps in the underlying asset price? Is the pattern likely to be more pronounced for a 2-year option than for a 3-month option?

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