Which of the following could cause the volatility smile typically seen for foreign currency options?
A) Currencies are traded in different countries at different times of the day
B) Currencies tend to have low volatilities
C) The activities of central banks causes occasional jumps in the exchange rate
D) Interest rates may be different in the two countries

Question

Quizplus · Accepted Answer

The possibility of jumps in the exchange rate makes extreme exchange rates more likely and is consistent with the volatility smile that is observed.

Which of the Following Could Cause the Volatility Smile Typically