Question

What volatility smile is likely to be observed when: (a) Both tails of the stock price distribution are less heavy than those of the lognormal distribution? (b) The right tail is heavier, and the left tail is less heavy, than that of a lognormal distribution?

   What volatility smile is likely to be observed when:
(a) Both tails of the stock price distribution are less heavy than those of the lognormal distribution?
(b) The right tail is heavier, and the left tail is less heavy, than that of a lognormal distribution?
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Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 20, Problem 1 ↓

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In this case, the volatility smile is likely to be relatively flat, indicating that the market expects similar levels of volatility for both out-of-the-money (OTM) call options and out-of-the-money put options.  Show more…

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What volatility smile is likely to be observed when: (a) Both tails of the stock price distribution are less heavy than those of the lognormal distribution? (b) The right tail is heavier, and the left tail is less heavy, than that of a lognormal distribution?
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