Volatility Smiles: Impact of a Single Jump
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1. Context
In this short video, we take a look at the impact of a single jump in the underlying stock price on the observed behavior of implied volatility vs strike profile for vanilla options traded on this stock. We use Monte Carlo simulation technique to validate the claim that the resulting stock price distribution is a mixture of lognormals, with slimmer tails relative to an equivalent lognormal distribution. The details of the reading in which this topic appears are given below:
| Area | Market Risk |
| Reading | Volatility Smiles |
| Reference | John C. Hull, Chapter 20. Volatility Smiles In Options, Futures, and Other Derivatives, 10th Edition, (New York: Pearson, 2017). |