Timeline for Fair Strike for Variance Swap with no Skew in IV Surface
Current License: CC BY-SA 4.0
11 events
| when toggle format | what | by | license | comment | |
|---|---|---|---|---|---|
| Nov 2, 2019 at 21:10 | vote | accept | Anthony Edward Maylath | ||
| Nov 2, 2019 at 21:09 | answer | added | Anthony Edward Maylath | timeline score: 0 | |
| Oct 26, 2019 at 23:18 | comment | added | Anthony Edward Maylath | Thanks again. Indeed, I missed a factor of five in my comment. The explanation is clear. Feel free to answer the question. I will approve it :) | |
| Oct 21, 2019 at 11:59 | comment | added | Quantuple | Do you miss a times 5 in your expression? What you are observing is a discretisation error. You have a single integral which you replace by two sums. Because the put (resp. call) price as a function of strike is increasing (resp. decreasing) replacing the integral $\int_{K_i}^{K_i+\delta K} f(K) dK$ by $ f(K_i) \delta K$ will lead to an underestimatation (resp. overestimatation). Note that for the integral over $K=100$ and $K=105$ you will also have an overestimation since you are using put prices. Just plot the true function and visualise the true area under the curve versus your rectangles. | |
| Oct 19, 2019 at 19:24 | comment | added | Anthony Edward Maylath | I assume rates and dividend are zero and compute $K^2 = \frac{2}{T}\Big[\sum_{i=1}^{20} \frac{P(i*5)}{(i*5)^2} + \sum_{i=21}^{40} \frac{C(i*5)}{(i*5)^2}\Big]$ where I assume the underlying name is trading at 100 and all the calls and puts are evaluated at the same IV. Only strike changes. | |
| Oct 19, 2019 at 19:15 | comment | added | Quantuple | Can you describe the exact way you replicate it? Is this simply a discretisation error? | |
| Oct 19, 2019 at 19:13 | comment | added | Anthony Edward Maylath | Thanks, Quantuple. In my example, I use a constant IV for every option in my VS replication. The results are still slightly higher than the ATM IV. For me, there is no convexity with this approach. | |
| Oct 19, 2019 at 19:10 | history | edited | Anthony Edward Maylath | CC BY-SA 4.0 |
Use constant volatility when I try to replicate.
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| Oct 17, 2019 at 10:21 | comment | added | Quantuple | You have no skew, but what about convexity? Check out this related question: quant.stackexchange.com/questions/27539/… | |
| Oct 17, 2019 at 1:35 | review | First posts | |||
| Oct 17, 2019 at 7:48 | |||||
| Oct 17, 2019 at 1:31 | history | asked | Anthony Edward Maylath | CC BY-SA 4.0 |