0
$\begingroup$

Why is it more accurate to use stochastic volatility when pricing let's say a forward start option (ie an option priced today but striked in a future date) ?

$\endgroup$
1
$\begingroup$

Local vol model gives a "too shallow" forward skew. Derivatives of which the price are depending on the forward skew will be mispriced. If i remember correctly, Hagan's paper

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.