Hull.16.09
Category:Hull -> Chapter 16
Question:
What volatility smile is likely to be observed for 6-month options when the volatility is uncertain and positively correlated to the stock price?
Answer:
When the asset price is positively correlated with volatility, the volatility tends to increase as the asset price increases, producing thin left tails and fat right tails. Implied volatility then increases with the strike price.