What volatility smile is likely to be observed for 6-month, Finance Basics

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What volatility smile is likely to be observed for 6-month

1. Explain what is meant by ‘‘crashophobia.''

2. A stock price is currently $20. Tomorrow, news is expected to be announced that will either increase the price by $5 or decrease the price by $5. What are the problems in using Black-Scholes-Merton to value 1-month options on the stock?

3. What volatility smile is likely to be observed for 6-month options when the volatility is uncertain and positively correlated to the stock price?

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