FRM Part II · FRM Exam Part II · Volatility Smiles and Volatility Surfaces
A risk analyst at a bank plots implied volatilities of European options on a stock against both strike price and time to maturity in a single three-dimensional chart. What is this chart called?
The chart is a volatility surface because it displays implied volatility across both strike prices and maturities. A smile or skew covers only the strike dimension for one expiry, and a term structure covers only the maturity dimension.
- AA volatility surfaceCorrect
- BA volatility smile
- CA volatility term structure
- DA volatility skew
Explanation
A volatility surface shows implied volatility as a function of both strike and maturity. A smile or skew shows variation across strike for one maturity. A term structure shows variation across maturity only.
Did you get it right without looking?
One question tells you little. A timed set on Volatility Smiles and Volatility Surfaces shows your real accuracy, how long you take and where you lose marks.
More Volatility Smiles and Volatility Surfaces questions
- A risk analyst observes that implied volatilities for one-year options on an equity index fall steadily as the strike price rises from 80% t…
- A bank's volatility surface for a stock index shows a pronounced skew at the 1-month maturity but a nearly flat profile at the 5-year maturi…
- Implied total variance is sigma^2 times T. At-the-money implied volatility is 20% for a 1-year option and 22% for a 2-year option. Assuming …
- A trader finds that the implied volatility surface for a stock shows a much higher implied volatility for a 90-day option at one strike than…
- A one-year European call and put on a non-dividend stock share the same strike K and maturity. The put's implied volatility is 28%, and the …
- A trader notes that a one-month GBP/USD option smile is quite pronounced while a five-year option smile on the same pair is much flatter. Wh…