"Volatility smile" is referred to as evidence against the Black-Scholes model. Why is that? а. Black-Scholes model generates option premium close to the observed premium if the observed stock volatility is used

"Volatility smile" is referred to as evidence against the Black-Scholes model. Why is that? а. Black-Scholes model generates option premium close to the observed premium if the observed stock volatility is used

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 6MC

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Question

"Volatility smile" is referred to as evidence against
the Black-Scholes model. Why is that?
а.
Black-Scholes model generates option premium
close to the observed premium if the observed stock
volatility is used
b.
Volatility of returns on one and the same stock, over
one and the same future period of time, can only take
one value

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