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This is the case for equity options, however for foreign exchange options the volatility only decreased at ATM.

Why is it that the vol used for one type of out/in the money is higher than the other, unlike the uniform case for foreign exchange?

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    $\begingroup$ They are different asset classes. Fx is the ratio of two assets - so how do you define "low strike"? According to some arbitrary convention? $\endgroup$ – will Jul 3 at 8:40
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On the Equity side the Skew introduces correlation between volatility and future prices because of:

  • leverage effect: when Equity prices go down the leverage debt/equity increases making the underlying more and more risky

  • crashophobia/behavioural finance: due to disposition effect, investors are more concerned/afraid about losses than optimistic for gains

The negative relationship is empirically supported.

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