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Part I
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Volatility
Volatility
Medium
In the equity index options market, implied volatility for a 3-month expiration is observed to be 24% for 90%-strike puts, 18% for at-the-money options, and 15% for 110%-strike calls. This pattern is best described as:
A
A volatility skew, driven primarily by demand for downside protection and fat left tails in equity returns
B
A volatility smile, driven by equal demand for puts and calls
C
A flat volatility surface, consistent with Black-Scholes assumptions
D
An inverted volatility term structure caused by near-term event risk
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Tags
#volatility-skew
#implied-volatility
#equity-options
#crashophobia
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