On pricing Options the volatility surface is represented by a mathematical model (with parameters).

  • What does it mean to calibrate the volatility surface
  • How often has the volatility surface to be calibrated
  • What factors determine when the volatility surface to be calibrated

I know about the volatility smile graph (implied volatility vs strike price for a particular expiry), I would assume this graph can be mathematically represented by a spline with anchor points

With this in mind, what does it mean to 'calibrate the volatility surface' ? - Does it mean we would have to change anchor points based off updated market data (option prices in the market used to calculate the new implied volatility) ?


closed as off-topic by JejeBelfort, Alex C, skoestlmeier, amdopt, LocalVolatility Sep 27 '18 at 20:35

This question appears to be off-topic. The users who voted to close gave this specific reason:

  • "Basic financial questions are off-topic as they are assumed to be common knowledge for those studying or working in the field of quantitative finance." – JejeBelfort, Alex C, skoestlmeier, amdopt, LocalVolatility
If this question can be reworded to fit the rules in the help center, please edit the question.

  • $\begingroup$ A volatility surface is like a weather map (a mathematical representation of a real world phenomenon). A weather map has to be constantly updated because the weather changes and we are unable to accurately determine those changes from mathematical modeling alone (at least not with sufficient accuracy). $\endgroup$ – Alex C Sep 26 '18 at 15:13
  • $\begingroup$ Thanks for the explanation; I will update my question with additional specifics. $\endgroup$ – v2. Sep 26 '18 at 15:20
  • $\begingroup$ Since this question has been marked as off-topic; since its deemed as a 'basic financial question'. Any suggestions on where I can post this question, with someone providing an answer. $\endgroup$ – v2. Oct 5 '18 at 9:26