Question
A trader wants to use the volatility implied from an at-the-money call option on a foreign currency to price other call options on the same
A trader wants to use the volatility implied from an at-the-money call option on a foreign currency to price other call options on the same currency. Given the volatility smile for foreign currency options, which of the following would be true?
Group of answer choices
Both deep out-of-the money and deep in-the-money call prices would be too high.
Deep out-of-the-money call prices would be too high and deep in-the-money call prices would be too low.
Both deep out-of-the money and deep in-the-money call prices would be too low.
Deep out-of-the-money call prices would be too low and deep in-the-money call prices would be too high.
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