Tag Info

There is another reason why Stoc Vol Models should be usually prefered to Local vol Models, this reason is explained in the Hagan et al. paper "Managing smile Risk" about SABR process and is in simple terms the fact that "smile dynamics" is poorly predicted by local vol models leading to bad Hedging of exotic options. Anyway Local Vol models have the good ...

The reason for put and call volatilities to appear different is that the implied vol has been calculated using different drift parameters than those implied by the market. Let's take everything in the model as given except the interest rate $r$ and the volatility $\sigma$. For European options we have the Black-Scholes formula for put and call values ...

Jump volatility is a term sometimes used to describe randomly varying jump sizes in a model with asset value jumps. So strictly speaking it is merely a parameter in generic jump diffusion. Both local volatility models and jump diffusions end up resulting in skew and kurtosis (of Black-Scholes volatilities). However, they are complementary in practice, at ...

For pricing, there are a few products whose prices are sensitive to the forward smile and when you compute that with just local vol, it is not realistic. So if you are a seller, you go to the next church and find something that looks kindof reasonable, and that kind of can reconstruct a reasonnable forward smile structure. The game in pricing is to not ...

The OpenGamma Analytics Library definitely does have a Local Volatility model available. In addition, in our Quantitative Papers page there's a link to the full mathematics and basis for our Local Volatility implementation. I'd be interested to know why you decided to write your own rather than using one of the above.