FRM二级《市场风险测量与管理》:Black-Scholes-Merton(BSM)model

A risk manager is examining a firm’s equity index option price assumptions.The observed volatility skew for a particular equity index slopes downward to the right.Compared to the lognormal distribution,the distribution of option prices on this index implied by the Black-Scholes-Merton(BSM)model would have:
 
A.A fat left tail and a thin right tail.
 
B.A fat left tail and a fat right tail.
 
C.A thin left tail and a fat right tail.
 
D.A thin left tail and a thin right tail.
 
FRM二级考试科目《市场风险测量与管理》
 
Answer:A
 
Explanation:A downward sloping volatility skew indicates that out of the money puts are more expensive than predicted by the Black-Scholes-Merton model and out of the money calls are cheaper than expected predicted by the Black-Scholes-Merton model.The implied distribution has fat left tails and thin right tails.
 
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