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, ~3,230 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. Skew interpretation: equity skew reflects crash risk (left-tail premium) and leverage; FX smile reflects symmetric jump risk in both directions. Sticky-strike vs sticky-delta are...
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What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Key Takeaways
- Exam Shortcuts
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