Volatility Smiles and the Fundamental Review of the Trading Book
Free GARP FRM Part II lesson in Market Risk Measurement and Management. 22 min read, ~3,338 words.
Volatility smile: implied vol varies by strike and maturity, contradicting Black-Scholes' constant- assumption. Equities show a downward skew (puts above calls), FX shows a symmetric smile. Implied distribution: the smile reveals the underlying is not lognormal. Equity skew implies a fatter left tail (crash risk, leverage), FX's symmetric smile implies...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Check Your Understanding
- Exam Shortcuts
Learning objectives
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