smile

n. a line, graphed on a parabolic or bowl-shaped curve, that represents a risk or return relationship in investment markets. Subjects: English, Money & Finance

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Citations: *1999 Gary L. Gastineau, Mark P. Kritzman Dictionary of Financial Risk Management @ IFCI Risk Institute “Glossary”: A reference to the common shape of a graph of at- or out-of-the-money put and call implied volatilities for options with a common expiration date. The name comes from the fact that the furthest out of the money options generally have the highest implied volatilities, causing the ends of the graph to turn up. *2003 André Jaun Hedging Your Portfolio: Options, Swaps and Derivatives (Aug. 18) “Glossary of keywords”: Smile: Graph with a minimum implied volatility for an underlying at-the-money. 2003 Jean-Philippe Bouchaud, Marc Potters Theory of Financial Risk and Derivative Pricing (Dec. 11) p. 70: This has direct consequences for the dynamics of the volatility smile observed on option markets. *2004 riskglossary.com “Volatility Skew”: The pattern of implied volatilities form a “smile” shape, which is called a volatility smile. Most derivatives markets exhibit persistent patterns of volatilities varying by strike…In practice, either the term “volatility smile” or “volatility skew” (or simply skew) may be used to refer to the general phenomena of volatilities varying by strike. Indeed, you may even hear of “volatility smirks” or “volatility sneers”, but such names are often as much whimsical as they are descriptive of any particular volatility pattern. 2004 Australian Financial Review (May 28) “How to go bust in a state of bliss”: Hardly a line of David’s trading argot will be intelligible to ordinary mortals, being riddled with references to gamma smiles, 25 delta EUR calls, short vega books and the like.

Posted 27 May 04 | Permalink | Tell a Friend