| CHAPTER 18 |

Skewness and Kurtosis

In order to generate theoretical values that more closely approximate option prices in the marketplace, a trader may vary volatilities across exercise prices, thereby creating a volatility skew. The skew is often expressed as a mathematical function with at least two inputs: the skewness (the slope of the volatility skew) and the kurtosis (the curvature of the volatility skew).

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In the following questions you are using an option pricing model that requires a volatility, skew, and kurtosis input. All options are sensitive to changes in the volatility input. The ±25 delta options are most sensitive to changes ...

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