Questions tagged [volatility-smile]
The volatility-smile tag has no usage guidance, but it has a tag wiki.
170
questions
1
vote
0
answers
56
views
Questions on limitations of local volatility model
I am currently studying local volatility for equity models and I am trying to understand some limitations of the model:
1.
under local volatility, the forward smile gets flatter and higher.
Lorenzo ...
2
votes
0
answers
70
views
Good resources about Volatility Calibration with code Snippet
As I just landed in the quantitative finance world, I would like to dig deeper into Volatility Surfaces construction.
I have a good theoritical background ( I'm familiar with volatility models ) but I'...
1
vote
0
answers
62
views
what does correlation $\rho$ means in surface SVI?
Why does everyone say $\rho$ is correlation in Surface SVI?
$w = \frac{\theta_t}{2}(1+\rho\psi(\theta_t)k + \sqrt{(\psi(\theta_t)k+\rho)^2+1-\rho^2})$, with $\rho \in [-1,1]$
This paper says it is ...
0
votes
0
answers
52
views
Using the SABR Model to Calibrate the Implied Volatility Smile/Surface of an American Option
If I already know the implied volatility smile/surface of an American option, can I directly use the SABR model to calibrate the smile/surface, or do I need to make certain adjustments first?
2
votes
1
answer
199
views
Volatility swaps hedging
I have heard that traders use a straddle to hedge volatility swaps (in the FX context), although I could not figure out the specifics. Is this type of hedge used in practice? And if yes, how does it ...
0
votes
1
answer
122
views
Smile wings and varswap pricing
Is it true that far wings of the volatility smile have an outsized influence on the price of a variance swap? Is there a mathematical argument demonstrating this idea? What do we generally refer as ...
3
votes
2
answers
481
views
Is it possible to have only one volatility surface for american options (that fits both calls and puts)?
Put-Call Parity does not hold for american options. Hence, I don't see how it would be possible to have one surface that would encompass both calls and puts.
For example:
Let pick a call lying in the ...
0
votes
0
answers
105
views
University Problem about interpolation Implied volatility BS Model (volatility smile)
Good morning,
this is my first question on this forum, I'm writing from Milan (Italy) and I have a question about a University Problem.
The problem is about entering in a Long Range Forward (buy a ...
3
votes
0
answers
130
views
How you explain that result?
I'm reading this paper :
What Does the Individual Option Volatility
Smirk Tell Us About Future Equity Returns?
Yuhang Xing, Xiaoyan Zhang, and Rui Zhao∗
In section 2. A i found this equation:
... And ...
0
votes
0
answers
283
views
Mid-curve swaption pricing - how to get the spread vol?
I believe I understand the following (from the accepted answer to the Quantitative Finance question called "volatility of a mid curve option"):
A swaption in which the underlying swap ...
1
vote
2
answers
102
views
hedging out of cross-ccy vol risk using direct ccy options [closed]
Lets suppose a G10 FX vol market-maker starts out with a flat book. During the day, the market-maker bought a EURUSD 1 week ATM straddle from one client while sold USDJPY 1 week ATM straddle from ...
1
vote
0
answers
71
views
Contradictory arguments for ATM/ITM/OTM option demand
I am trying to understand which of the options have the most demand, and found this discussion here. The arguments presented are as follows:
ATM is more liquidly traded than ITM/OTM because they are ...
0
votes
0
answers
170
views
Convert implied probability into real probability
In this article I have read that:
A risk-neutral world is one where all investors are indifferent to risk and don’t require any extra risk premium for the risk they bear. In this world, all assets (...
0
votes
1
answer
677
views
simple volatility surface interpolation
I'm trying to build an implied vol surface from some listed options. In particular I have data for calls and puts for different strikes and expiries. I'm not looking to price on the interpolated vols ...
2
votes
0
answers
118
views
Vasicek Model: smile dynamics
I have come across the statement that the Vasicek model cannot be used to price skew / smile sensitive products: i.e. it cannot be calibrated to replicate a skew or smile. Why is that?
My guess is ...
3
votes
2
answers
407
views
How do market-makers profit & manage inventory when customers sell a lot of deep OTM options?
In a live example: Today is June 14, 1 hour before market close, and \$SPY (S&P 500 ETF) is currently at \$372.28 and the June 15 \$350 strike Put is being quoted for \$0.13 on the bid and \$0.14 ...
2
votes
1
answer
840
views
Heston Model python MC simulation
I have this exercise.
$\\\\$
Look for realistic values of the parameters and calculate the price of a European Call with maturity $T = 0.5$ and $S_0 = 1$ for the strike values $K = 0.5,0.6, ......,...
-1
votes
1
answer
155
views
Help needed in replicating FX Implied Vol Surface
I am relatively new to this area and am doing some self studying on SLV model. I am however getting stuck on trying to replicate this implied vol surface (which I will use to calculate the local vol)
...
0
votes
1
answer
293
views
Deriving vol of vol from volatility futures price
From Colin Bennet's trading volatility (pg 117), he says:
"A forward on a volatility future is short vol of vol. This means it is possible to back out the implied vol of vol from the price of ...
0
votes
0
answers
76
views
Vanna-Volga consistency result
In the Vanna-Volga (VV) paper by Castagna and Mercurio they state that, once you build up a curve of prices by interpolating-extrapolating on $K$, you can recover the same exact curve by redefining ...
3
votes
0
answers
211
views
SABR LMM for RFR
Is there a research showing a way to use SABR LMM with new RFRs such as SOFR, i.e. pricing exotic path-dependent RFR derivatives with volatility smile and skew?
I'm aware that
Looking Forward to ...
1
vote
0
answers
153
views
Market models of implied volatility and no arbitrage
Something has been bugging me for a while, and I can't really find an answer to it in papers. Maybe somebody can help me out.
In addition to modelling the instantaneous vol, or modelling forward ...
2
votes
0
answers
57
views
Expectation of Product of two European Option when vol smile exist
Currently I'm thinking about how to calculate the expectation of the product of two euro option, which is
$E[(S_T-K_1)^+(S_T-K_2)^+]$
I can fit some parametric vol model from the market listed option ...
0
votes
0
answers
116
views
The relationship btwn RV-IV and realized skew
In studying skew I've been advised to focus on understanding on components that affect it. One such component that's been recommended to me is the relationship btwn RV-IV and realized skew. ...
3
votes
1
answer
241
views
Calibration of a volatility smile model on a partial smile
I'm using a well-known SABR model in order to build an implied volatility surface of caps/floors on a very illiquid market which is entirely missing OTM quotes. What happens to SABR implied smile/...
1
vote
0
answers
259
views
How to calculate the strike for a sticky delta volatility curve
I am sourcing the implied volatility for pricing the option. I am getting the volatility against delta but not the strike amount for those. How do I convert the delta into the strike to find the right ...
0
votes
0
answers
891
views
Bloomberg OVML| FX option pricing | Python
Wanted to check if any API for python is available to replicate Bloomberg's OVML.
The objective is to perform FX options pricing for multiple positions, and we are getting stuck in calculating ...
1
vote
1
answer
543
views
Pricing binary options under volatility smile
I was asked to show that the price of a digital/binary option $D$ while a volatility smile $\sigma(K)$ is present is given by
$$D= \exp(-rT)( \Phi(d_2) - K \sqrt{T} \phi(d_2) \sigma ' (K))$$
Where $\...
0
votes
0
answers
70
views
Can call price increase in falling markets
Say SPX falls so much that there is panic and implied volatility(iv) increases so greatly that OTM call prices are increased during the fall due to high iv
In my observation in historical data this ...
0
votes
0
answers
104
views
Clarity regarding Skew adjustment for binary options
I am reading the section on Skew adjustment for binary options on wikipedia (https://en.wikipedia.org/wiki/Binary_option#Skew) and am trying to get my head around it and gain some intuition.
First ...
1
vote
1
answer
2k
views
Fitting a volatility smile with pySABR -- Python implementation of SABR model
In order to model some volatility smiles I'm using the python's pySABR package.
I ran into a situation when I have two almost identical pieces of code for two different volatility smiles missing the ...
0
votes
1
answer
463
views
Can't fit Bloomberg volatility smile with pysabr. What am I doing wrong?
I want to make sure that I can properly use SABR model on 1-period interest rate options, i.e. caplets, therefore I attempted to get lognormal volatilities for 4%, 6%, ATM, 8%, 10% strikes for 3Mx6M ...
4
votes
0
answers
241
views
Why calibrate volatility Models to volatility surfaces rather than underlying's historical price data?
I'm trying to grasp the rationale for calibrating stochastic volatility models (i.e. Heston model) to empirical IV data from market prices. Doesn't this assume that the options are fairly priced and ...
1
vote
1
answer
164
views
How to extract volatility smile implied by a mixture model?
If one had to extract the implied volatility smile from a local volatility model, one can simply use the relationship:
$\sigma^2_{imp}(t, x)T = \int_t^T \sigma^2_{loc}(s, x)ds$
with $\sigma_{loc}$ the ...
0
votes
1
answer
462
views
Difference of polynomial interpolation for volatility smile
I am using 5 volatility points to build a volatility smile : put 10D, put 25D, ATMF, call 25D and call 10D. I have thus 5 pairs of data : (Delta, Vol) let's say for example (10;5.75) ; (25; 5.50) ; (...
1
vote
0
answers
77
views
is the concept of skew observed in fixed odds betting markets?
Bear with me if this sounds a little flippant, but this has got me curious. I know "sports arbitrage" is an active economic activity, although the arbitrage arguments, I think, are not ...
2
votes
1
answer
83
views
Do single name stock option volatility surfaces exhibit steeper volatility smiles after stock price crash episodes?
In index options, there was not much of a smile (on the put-side) until the 1987 market crash.
I'm wondering if the same applies to single name stocks? That is, do price crashes in individual stocks ...
7
votes
2
answers
472
views
Black-Scholes: Volatility Smile "sharpens" with time to expiry
I have tried to calculate IV and log-moneyness (=log(S/K)) for different times to expiry
(M = less than 1 month, Q = less than 1 quarter, S = less than 1/2 of an year, Y = less than 1 year, Y (+) = ...
0
votes
1
answer
367
views
The most appropriate volatility model
Which would be the most appropriate models to find volatility trading opportunities (i.e. plot a theoretical volatility smile I can rely on) for the following instruments:
Options on equity
Options ...
8
votes
1
answer
900
views
Bermudan Swaptions - Payer vs. Receiver (LGM)
There is abundant literature discussing the pricing of Bermudan swaptions and the relevance of single-factor Markov-functional models (e.g. LGM) versus multi-factor market models (e.g. LMM).
From a ...
7
votes
1
answer
398
views
Negative Density in Local Stochastic Volatility (LSV) Model Calibration
I'm trying to calibrate Local stochastic volatility model using finite difference method, and I'm mainly following this referece: Tian (2015).
I met a problem when calibrating leverage function - the ...
2
votes
1
answer
445
views
What is the difference between a volatility smile and a correlation smile?
I understand to plot correlation and volatility smiles, we have to plot the implied normal vol vs strike and observe a U-shaped relationship. How are these smiles different? Does a vol smile plotted ...
4
votes
2
answers
456
views
Intuitive explanation for the value of a binary option being lower when volatility skew is positive?
According to the formula for pricing binary options with a volatility skew, it appears that the value of the binary option for a given strike gets lower, the higher the volatility skew at that strike. ...
4
votes
1
answer
275
views
Can we observe smile arbitrage from the implied and local volatility?
Here are graphs of implied volatility and local volatility. Our prof mentioned that we can observe that the short end low strike region has some smile arbitrage. I would like to know how?
Thanks
1
vote
0
answers
155
views
How could option vega be remapped on reduced volatility surface?
try to be clear to ask my question:
Suppose the original vol surface is a n by m matrix where n is the number of pillars in the volatility term structure and m is the number of strikes. According to ...
1
vote
1
answer
199
views
Clean noisy data from arbitrage
My problem is that I have a surface of implied black volatilites that is supposed to represent market data. However, the surface contains some slight arbitrage.
More precisely, the graph contains ...
2
votes
1
answer
594
views
Relationship between time decay and gamma
In a paper titled Investing in Volatility published in 1998 by Emanuel Derman, Michael Kamal, Iraj Kani, John McClure, Cyrus Pirasteh, and Joseph Z. Zou, I found the following assertion (on page 9) ...
2
votes
1
answer
559
views
Forward starting options concepts
Consider $t_0<t<T$, with $t_0=0$ (today date) and the standard payoff of a vanilla forward starting call option,
$F_{t,T} = (S_T - S_t\cdot K)^+$, with strike $K$.
If the price of this option is ...
1
vote
1
answer
159
views
How does a concave up volatility smile correct high kurtosis for ATM option contracts?
Theoretically speaking, if we are to assume the following:
Constant implied volatility throughout all strike prices
The underlying's prices change distribution is log-leptokurtic and symmetric
Then ...
3
votes
2
answers
1k
views
Question About SVI and SSVI Tradeoff between Fitness and No-Arbitrage
I’m currently working on a project to build a local volatility model out of implied volatility data and am struggling in the selection of an appropriate method to interpolate the volatility surface. I ...