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Why is there a smile in the foreign currency option? a. In the real world, the volatility of exchange rates frequently jumps, resulting in the likelihood of extreme events b. The volatility smile created by constant volatility as the maturity of option increases C. In the lognormal distribution of currency returns, volatility is assumed to vary with time d. In the lognormal distribution of currency returns, exchange rates are assumed to vary smoothly e. The percentage impact of nonconstant volatility on prices becomes less pronounced as the maturity of the option is increased Your answer is incorrect. The correct answer is: In the real world, the volatility of exchange rates frequently jumps, resulting in the likelihood of extreme events Why is there a smile in the foreign currency option? a. In the real world, the volatility of exchange rates frequently jumps, resulting in the likelihood of extreme events b. The volatility smile created by constant volatility as the maturity of option increases C. In the lognormal distribution of currency returns, volatility is assumed to vary with time d. In the lognormal distribution of currency returns, exchange rates are assumed to vary smoothly e. The percentage impact of nonconstant volatility on prices becomes less pronounced as the maturity of the option is increased Your answer is incorrect. The correct answer is: In the real world, the volatility of exchange rates frequently jumps, resulting in the likelihood of extreme events