# Tagged Questions

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### SABR model: from calibration to mapping the smile/skew in a graph

Let's say that I have a calibrated SABR model in FX market (eg for Eurodollar options). So I have estimated values of beta, rho, alpha, and vol of vol. How do I map the calibration in a (strike, vol)-...
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### Downward sloping smile in normal model

We consider an stock price $S$ following a normal model: $dS_t = \sigma dW_t$ We can write this as $\frac{dS_t}{S_t}=\frac{\sigma}{S_t}dW_t$ Hence we can see that $S$ follows a "log-normal" ...
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### construct volatility smile based on historic observations

So I calculated historic volatility/skewness/kurtosis for a commodity. I now would like to construct a volatility smile that reflects this historically realized distribution. I tried using some ...
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### Is it possible to find / estimate the volatility surface of non-listed index options?

I have 3 QNET options (european, 2 puts, 1 call, all same expiry, different strikes) that the broker is pricing clearly off a volatility surface. Bloomberg only carries historical volatility and I ...
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### ATM volatility and flat volatility

Why do the implied volatility curve and the flat curve cross over the ATM volatility (at 100%) ? Tx
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### What are some markets that don't have volatility smiles and why don't they?

I have read that volatility smiles didn't show up for equity options until 1987. Can some one give me an example(s) of what markets now still don't have volatility smiles and what an explanation for ...
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### Transforming 3M volatilities into 6M volatilities in EUR forecast curves

I have implemented a stripping algorithm to extract forward volatilities from cap/floor flat volatilities for different currencies. I am however struggling a bit when implementing a method to convert ...
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### Vol surface changes as underlying moves

We market make in highly liquid, near term options markets. I want to build a risk report that tells us how our portfolio's greeks will change as the underlying moves. This is for risk management in ...
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### SVI calibration, why fit to option prices and not implied volatilities

Bear with me. Related (very good) question: How to calibrate a volatility surface using SVI From this paper http://arxiv.org/pdf/1204.0646.pdf, page 21. Why does the recipe suggest fitting to option ...
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### Volatility smile risk (negative effect) on dynamically hedged portfolio?

About last week you can see MSFT call & put option appears to be resembling volatility smile. And then I open trade positions on a 4 MSFT long call option contract (all 4 contract with fixed/...
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### Vega hedging with implied volatility smile

I have a problem with vega hedging. Consider the management of an exotic derivative, such as Barrier option. Typically we do the following tasks: selecting a pricing model, say, a local volatility ...
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### Connection between implied volatily and implied probability

I am reading some lecture notes about Black-Scholes (BS) option pricing. Since the BS-formula is not supported by observed data because of the dependence of the implied volatility on the strik and ...
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### Why is the volatility smile important

One thing I can't understand clearly is why there is so much focus on the volatility smile. Given my knowledge of the Black and Scholes model, this is what I get: People use the volatility smile as a ...
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### parameters in Heston model and their impact on volatility smile

Consider the Heston model given by the following set of stochastic differential equations: $$\frac{dS_{t}}{S_{t}}=\mu_{t}dt+\sqrt{V_{t}}dW_{t}, S_{0}>0,$$ dV_{t}=\kappa(\theta-V_{t})dt+\xi\sqrt{...
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### Why future (forward) volatility smile is important to path dependent option?

I was wondering why future volatility smile is important to path dependent option and American type option such as Bermudan swaption. It would be best if someone could provide a reference article as ...
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### Effect of vol smile on risk neutral probability of ITM

I was asked in an interview about how the vol smile affect the price of a binary option, which is essentially the Prob(ITM) under risk neutral measure. My thought is that the implied vol at spot ...
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### Why does the volatility smile flatten as maturities increase?

First, I can't find a purely "financial" explanation for this. Also the only mathematical explanation I've found so far was using the large deviations theory, which is quite complex. Is there a ...
476 views

### Variance swap replication and variance vega

Noob here. I've been trying to gain a better understanding of variance swaps and what better way than to replicate it with a portfolio of better understood instruments. I have read the GS 1999 ...
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### Volatility Surface Constituents, do's and dont's

Recently I have been working a lot with implied volatility and volatility surfaces. The basic idea is easy to follow: 1) Gather market prices of options at different (Strike,Expiry) 2) Calculate ...
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### In Dupire's paper, why is $(S_t, t)$ in the $(K, T)$ space?

I'm new to local volatility model. From Dupire's paper and most of the textbooks, they derived the local volatility $\sigma(K, T)$ in the $(K, T)$ (i.e., strike and maturity) space, from call prices ...
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### Some questions about implied volatilities and how to generate theoretical prices when market prices are not available

I am building a little Excel file that take some option prices in input and plots the volatility smile/surface. I have a script that reads market prices from the option chain for 3 different ...
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### How do I track implied volatility of specific delta?

I'm a newbie with respects to volatility trading and options. I recently purchased a book on the topic called "Trading Implied Volatility -An introduction" by Simon Gleadall. It's been one of the most ...
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### Why vertical skew is same for puts and calls

What is the reason that the vertical volatility skew graph(decreasing IV as the strikes increase) is the same for the puts and calls? The loose explanation is because of put call parity, but I am not ...
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### SABR calibration: simple explanation and implementation

I would like to learn more about the SABR model and ho it is used in modeling smiles in equity, FX and rates markets. How would you explain the process and its implementation in simple steps? Any web ...
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### Volatility skew and how to capture it?

We see in the market that a implied volatility surface is not flat. Based on this observation different models were developed to capture the structure, e.g. CEV / SABR. A measure often used for the ...
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### For which instruments performs SABR/LMM better than LMM?

For which class of instruments the SABR/LIBOR Market Model does perform better than the classical LIBOR Market Model? The LIBOR Market Model The LIBOR Market Model — also known as Brace, Gatarek, ...
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### QuantLib: Black / BSM processes and pricing via volatility surface. Different results?

I start this question with a couple of C++ functions that will be useful to show some results. So start your Visual Studio C++ Express or Ceemple or whatever you want and copy & paste this: ...
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I am reading a paper that very briefly talks about some volatility arbitrage strategies. It's so brief that I do not exactly understand how it works. It says one of the strategy is based on "short ...
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### Volatility tools / web sites?

Could someone give recommendations regarding volatility tools / web sites that they find useful? I am looking for information that my brokerage platform does not provide. Specifically, I want to see ...