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You can view the price of an option as the cost to dynamically replicate it. The more volatility, the more costs you will have trading the underlying to keep your delta equal to 0 (I'm assuming you sold the option, hence a negative gamma position). So, if at any spot, any date your local vol is above 0.194, rebalancing the portfolio will be constantly more ...


First, please make sure that when you resimulate sample paths, you are keeping your underlying random samples constant, as in this answer. For your delta, vega and rho there is some ambiguity in the definition of the greeks. Consider the simple case of delta in the presence of a skew $\sigma(K/S)$, and say that the underlying price right now is $S_0$. We ...


Loosely speaking: Local volatility is the instantaneous volatility after time T if the spot is S at that time. Implied volatility is the expected integrated volatility from today up to time T if the spot ends up at S at that time.


Yes, there is a unique time homogeneous local vol model. This is proven in http://www.sciencedirect.com/science/article/pii/S0304414912002487. There is a slight generalization required that if the option-implied density is zero somewhere, the corresponding local vol is infinite in that region, giving a "gap diffusion". No, there is no nice formula for the ...


No. In practice the local volatility model has a finite number of slices, so a single slice works as well. Now the problem is : how to compute the time derivative ? Well without adding any information you know that $$ C(0,K) = (S_0-K)_+ $$ so you could try $$ C_\tau = \frac{C(\tau,K)-C(0,K)}{\tau} $$ but it is a very crude approximation. What you may want ...


Dupire model is just one way of generating a local volatility surface from an implied volatility surface. There are many other ways to generate a local volatility surface. One critical aspect of Dupire model is that the input implied volatility (IV) surface should be arbitrage free. If not, you will negative instantaneous variance when generating the local ...


No, if you are referring to the famous Dupire Model (there are others), then they are the same. It is usually referred to as the Local Volatility Model and the Dupire Equation. I would disentagle those with the concept of Local Volatility, which is model independent and a fairly deep result.

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