1
$\begingroup$

I will try to use SABR Model to price call options in FX market. What does it mean to calibrate the model? As far as my understanding of the Wikipedia article goes, it means to estimate the parameters. In this case: Alpha, Beta and the correlation of the wiener process. Have I understood correctly?

If yes, Can I estimate the parameters from price history or does it have to option prices?

Thanks! Sanjay, India

$\endgroup$
  • $\begingroup$ Calibration is finding the set of parameters for the function that replicate the observable. In this case, the SABR parameters which replicate the market values of the instruments you're calibrating to. Taking them from historical data is not calibrating - it will give you a good place to start your calibration though, hopefully make it faster. $\endgroup$ – will Jul 14 '16 at 14:29
2
$\begingroup$

Indeed parameters are selected so that the quoted option prices are as close as possible to the model option prices. Alternatively, quoted and model implied volatilities can be used instead of prices.The first category are those that minimize the error between quoted and model. The second category,are those that minimize the error between quoted and model implied volatilities.

You can use these

  1. http://www.mathworks.com
  2. SABR Implied Volatility and Option Prices
| improve this answer | |
$\endgroup$
  • $\begingroup$ Thanks for your answer. How can I estimate the parameters from price history? Or does it have to option prices? $\endgroup$ – user22571 Jul 15 '16 at 14:34
  • $\begingroup$ Please check two links $\endgroup$ – user16651 Jul 15 '16 at 15:20

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.