Test Bank: Chapter 19 Volatility Smiles In a volatility smile diagram (i) What is plotted on the horizontal axis? _ _ _ _ _ _ (ii) What is plotted on the vertical axis? _ _ _ _ _ _ Indicate whether the tails mentioned below are fatter or thinner than the tails for a lognormal distribution based on the at-the-money volatility (i) Left tail of foreign currency implied distribution _ _ _ _ _ _ (ii) Right tail of foreign currency implied distribution _ _ _ _ _ _ (iii)Left tail of stock index implied distribution _ _ _ _ _ _ (iv)Right tail of stock index implied distribution _ _ _ _ _ _ Which of the following is true (circle one) (a) Volatility smile for European puts is the same as that for European calls (b) Volatility smile for European puts is the same as that for American puts (c) Volatility smile for European calls is the same as that for American calls (d) Volatility smile for American puts is the same as that for American calls A volatility smile such as that seen for foreign currency options can be caused by (Circle two) (a) The fact that currencies are traded in different countries at different times of the day (b) The fact that volatility is not constant (c) The fact that the activities of central banks causes occasional jumps in the exchange rate (d) The fact that interest rates may be different in the two countries Which of the following is true (circle one) (a) The volatility skew for equities is much more pronounced now than it was in 1985 (b) The volatility skew for equities was much more pronounced in 1985 than it is now (c) The volatility skew for equities is consistent with the Black–Scholes model (d) The volatility skew for equities is similar to that for foreign currencies