Pattern of implied volatilities for options on exchange rate

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Reference no: EM131237882

1. What problems do you think would be encountered in testing a stock option pricing model empirically?

2. Suppose that a central bank's policy is to allow an exchange rate to fluctuate between 0.97 and 1.03. What pattern of implied volatilities for options on the exchange rate would you expect to see?

3. Option traders sometimes refer to deep-out-of-the-money options as being options on volatility. Why do you think they do this?

Reference no: EM131237882

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