Study Notes: Hull, Chapter 20: Volatility Smiles

Hull, Chapter 20: Volatility Smiles Study Notes contains 15 pages covering the following learning objectives:

Define volatility smile and volatility skew.
Explain the implications of put-call parity on the implied volatility of call and put options.
Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pricing of options on the underlying asset.
Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volatility.
Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its shape.
Describe alternative ways of characterizing the volatility smile.
Describe volatility term structures and volatility surfaces and how they may be used to price options.
Explain the impact of the volatility smile on the calculation of the “Greeks.”
Explain the impact of a single asset price jump on a volatility smile.

After reviewing the notes you will have the opportunity to apply what you learned with practice questions and answers.

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