Risk glossary

 

Volatility smile

Smile refers to the characteristic curve in a chart that shows implied volatility of a security, as derived with the Black-Scholes model with respect to its strike price. Typically, the lowest point of the smile corresponds to the at-the-money price, while for in-the-money and out-of-the-money prices implied volatility tends to be higher. This is interpreted as the market perception of a greater risk embedded in options as the price diverges from the at-the-money value.

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