1. What is the value of a long position in a one-year futures or forward contract on a non-income paying financial asset with a current price of $100, where Rf is 5% and the contract price is $90?
All else equal, what would a call option price traded above or below its theoretical value using a Black Sholes model imply about the market view of volatility in the future?
2. How does the implied volatility / strike price association or volatility smile for equity options differ from that of currency options? Explain in words and draw a graph showing the relationship between strike price and implied volatility for equity options and currency options, making sure difference is noticeable and the axis are labeled.
3. What are two explanations for the shape of the currency volatility smile?
4. What is one explanation for the shape of the stock options option volatility smile?