Publisher's Synopsis
The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. 'The Volatility Smile' presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it.
