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FRM Part II · FRM Exam Part II · Volatility Smiles and Volatility Surfaces

In FX markets, smiles are often quoted by delta rather than strike. What is the principal advantage of quoting implied volatility against delta for a dealer?

Quoting by delta keeps points on the smile comparable as spot and maturity change, because delta captures moneyness adjusted for volatility and time. It does not remove maturity effects, model use, or asymmetry in the smile.

  1. AIt makes the quoted volatility independent of the option's maturity
  2. BIt removes the need to use any option pricing model
  3. CIt allows the smile to be expressed in terms that remain comparable as spot and time to maturity change, since delta reflects the option's moneyness relative to volatilityCorrect
  4. DIt guarantees the smile is perfectly symmetric

Explanation

Delta embeds moneyness scaled by volatility and time, so quotes at fixed deltas stay meaningful as market conditions move. It does not remove maturity dependence, the model, or ensure symmetry.

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