The implied volatility smile is a graphical representation showing how implied volatility varies with different strike prices and expiration dates of options. It highlights the tendency for options with strike prices far from the current underlying asset price to exhibit higher implied volatilities compared to those with strike prices close to the asset price. This phenomenon connects to option pricing and hedging, as it provides insight into market expectations and risk perceptions for various options.
congrats on reading the definition of implied volatility smile. now let's actually learn it.