Volatility Smiles
Volatility Smiles
Volatility Smiles
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‣ The volatility used to price a low-strike-price option (i.e. adeep our-of-the-money put or a deep in-the-money call) issignificantly higher than that used to price a high strike-priceoption.‣ Once again, we turn to a comparison of the probabilitydistribution of the implied volatility and a lognormal onewith the same mean and standard deviation for an analyticalexplanation.6