Why do traders use volatility smiles for pricing options?
A) To allow for non-lognormality of the probability distribution of future asset price
B) Because it is consistent with recent market moves
C) As a tool to reflect their views about extreme market moves
D) Because extreme market moves are always more likely than Black-Scholes-Merton assumes

Question

Quizplus · Accepted Answer

Volatility smiles allow for the fact that the assumptions underlying the Black-Scholes-Merton model do not hold exactly.The BSM assumptions imply a lognormally distributed future asset price.

Why Do Traders Use Volatility Smiles for Pricing Options