Please tell me which currency pairs have the greatest FX smile? Do the major currency pairs have a less or more pronounced FX smile than the emerging currency pairs in general? Will the correlation for FX options rounds to zero for shorter dated options? Thanks in advance
I imagine that a smile is in part a function of the kurtosis (derived from actual OTM 25d/10d butterfly spreads over ATM). So I guess a pronounced smile is a result of wider fly spreads above (or sometimes below) ATM levels. In some thinly traded currency pairs, there may not even be an active OTM market, so much so that the only vols being published on Reuters or Bloomberg are the ATMs, resulting in a flat surface across all expiries i.e. no smile at all. I think a wider butterfly spread-over-ATM (i.e. a pronounced smile?) either implies that the market in general is very volatile and could go either way, or that the currency pair itself is so illiquid that there are not enough market makers.