- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 38. Valuation of Contingent Claims
- Subject 6. Option Greeks and Implied Volatility

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**CFA Practice Question**

The volatility surface should be ______ in theory. In practice it is ______.

B. flat; non-flat

C. non-flat; flat

A. flat; flat

B. flat; non-flat

C. non-flat; flat

Correct Answer: B

If the BSM model assumptions were true, then one would expect to find the volatility surface flat. In practice, the volatility surface is far from flat and often varies over time because the assumptions of the BSM model are not always true.

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