It is well known that the implied volatilities of options on the same underlying asset differ across strike prices and terms to expiration. However, the reason for this remains unclear. Before the development of theory to explain this phenomenon, it may be helpful to better understand the...

Prices of foreign exchange options systematically diverge from those consistent with several previous option pricing models. This paper examines whether alternative models better explaining the empirical dynamics of the foreign exchange futures markets can yield implied volatility surfaces...