Using the lognormal, instead of the implied risk-neutral probability distribution, will tend to:
A. Price the option on FBX relatively high and price the option on EUR/JPY relatively low.
B. Price the option on FBX relatively low and price the option on EUR/JPY relatively high.
C. Price the option on FBX relatively low and price the option on EUR/JPY relatively low.
D. Price the option on FBX relatively high and price the option on EUR/JPY relatively high.
Answer:A
Using the lognormal, instead of the implied risk-neutral probability distribution, will tend to:
A. Price the option on FBX relatively high and price the option on EUR/JPY relatively low. B. Price the option on FBX relatively low and price the option on EUR/JPY relatively high. C. Price the option on FBX relatively low and price the option on EUR/JPY relatively low. D. Price the option on FBX relatively high and price the option on EUR/JPY relatively high.
Explanation: The implied distribution of the underlying equity prices derived using the general volatility smile