Questions tagged [volatility-smile]
The volatility-smile tag has no usage guidance, but it has a tag wiki.
85
questions
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0answers
42 views
Extreme AUDJPY FX vols
I'm seeing levels of -12% of market strangle vol at 25 delta for AUDJPY at 20Y onward that is causing havoc with my pricing routines, the 10 delta market strangle is trading around -6% which is again ...
2
votes
3answers
270 views
Intuitive explanation for the smile in FX
What is the intuitive reason for the smile in FX?
For equities this usually down to crash risk.
0
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1answer
63 views
Downward-sloping volatility skew in equity prices
I’m learning the market price for FRM, and I’m having a hard time understand a question in the assessment:
From my understanding, the volatility skew for equity is the graph on the right upper corner:...
2
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0answers
137 views
Risk reversal basics and trading strategies
It it written in the book by Giles Jewitt:
"If a currency pair had a completely flat volatility smile, the risk reversal strikes would be positioned approximately symmetrically around the ATM strike ...
1
vote
0answers
48 views
FX Smile Curve Extrapolation
How a smooth smile curve is generated from 5 smile points : 10D RR, 25D RR, 10D SM, 25D SM and ATM? What are the commonly used extrapolation and interpolation techniques?
I have seen people ...
2
votes
1answer
91 views
FX smile extrapolation
Typically, 5 points data is available for smile construction : 25D RR, 25D SM, 10D RR, 10D SM and ATM. Questions: 1. How is a smooth smile curve generated with the help of these? 2. How is ...
2
votes
0answers
69 views
Smile Strangle and Market Strangle
What is the difference between Smile Strangle margin and Market Strangle Margin in fx derivative market? Is it just variation in convention or is there any mathematical relationship between the two?
2
votes
2answers
142 views
Why is the SVI parameterization in terms of variance?
The Gatheral SVI parameterization reads
$$\sigma^2 = a + b \left[\rho(k-m) + \sqrt{(k-m)^2+s^2}\right]\,.$$
Why is it expressed in terms of variance $\sigma^2$ and not directly in terms of volatility $...
2
votes
0answers
62 views
Local volatility Formula and How To use it
I'm new to Volatility Modelling, so the content of this question may be completely wrong and th question naive. I'm reading "The volatility surface" by Gatheral. I'm trying to get a sense of the first ...
1
vote
3answers
292 views
Why is volatility skew/smile for long term options flatter compare to short term options?
Volatility skew/smile for long term options is flatter compared to short term options, could someone help to explain why is that the case? Thanks
1
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1answer
73 views
Why and how is Implied volatility directly related to stock price but inversely related to strike price?
I know that in equity markets there is a volatility smirk which results in higher IV for lower strike price options because of crashophobia and leverage related factors but I can't wrap my head around ...
5
votes
1answer
223 views
Why do we fit volatility surfaces implied from a option pricing model to the empirical data?
As far as I understand volatility surface. It is made of 2 components, the volatility skew/smile and the volatility term structure. Together they form something like
Implied volatility is ...
1
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0answers
93 views
FX Volatility smile interpolation delta or Log moneyness - which is better?
I am trying to understand the difference between interpolating an FX volatility smile across deltas and log moneyness ( ln(K/F))
Since Delta is dependant on the vol, it seems there is a difference ...
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0answers
34 views
Is the implied volatility surface relative or stationary?
Do different strike values of options attain their volatility value dependent on their % distance from the ATM price continuously, or is the volatility surface stationary during a single day?
4
votes
1answer
162 views
Effect of Vol-of-Vol on VIX
What is the effect of vol-of-vol of an underlying on the VIX Index?
The VIX is computed as hedging portfolio of log contracts to isolate pure volatility exposure without specifying an underlying ...
1
vote
2answers
172 views
Volatility smile shows individual Put and Call IV or combination
IV is calculated per strike AND option type basis(for example WTI 50 CALL its x and WTI 50 PUT its y). The question is when its shown in "Smile" its just shown on strike basis, so does that mean lower ...
2
votes
1answer
284 views
LSV model calibration with only few quotes per maturity
At this link I have asked what is the market standard when pricing options in different asset classes. Based on the answers, the standard for FX and equities seems to be the local-stochastic ...
1
vote
1answer
323 views
What is market standard model in equity, FX and interest rates exotics?
Is there any industry consensus about the model to use for pricing exotics in equity, FX and interest rates?
I assume that for vanilla options they all use Black model, but how about exotics?
Also, ...
1
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0answers
272 views
Mixed local-stochastic volatility model in Quantlib
At a conference the speaker mentioned that it is a standard approach today to use a mix of local and stochastic volatility model in equity, FX and interest rates.
Can you please suggest the most ...
2
votes
0answers
68 views
The Free Boundary SABR: Natural Extension to Negative Rates
In the paper by Antonov, Konikov and Spector
An alternative approximation for the SABR model is presented.
I'm interested to implement the formula for the ATM swaptions implied volatilities in the ...
4
votes
2answers
2k views
Sticky Strike or Sticky Delta
Given market tick data for a single tenor for a futures and a set of options on the futures, how can I say if the IVs in the market at this point is sticky strike or sticky delta?
I was trying to ...
6
votes
0answers
101 views
Produce volatility smile/skew with G2++ model
Suppose I have a G2++ short rate model:
$$r(t)=x(t)+y(t)+\phi(t), \quad r(0)=r_0$$
with
$$dx(t)=-ax(t)dt+\sigma dW_1(t), \quad x(0)=0$$
$$dy(t)=-bx(t)dt+\eta dW_2(t), \quad y(0)=0$$
$$d\langle W_1,W_2\...
4
votes
1answer
242 views
SSVI parametrization motivation , SSVI implementation
I've read the following paper of Gatheral and Jacquier https://arxiv.org/pdf/1204.0646.pdf about volatility surfaces. I'm thinking about the SSVI surface. Is there any motivation why they choose ...
1
vote
1answer
80 views
Filter options used in the construction of implied volatility surface
Currently trying to model the IV Surface using the APPL options, to compare how different models of the underlying move the IV Surface. However, after getting the data, I've seen that some option ...
7
votes
0answers
351 views
Arbitrage free smoothing of volatility smile - cubic spline - implementation procedure
I am studying the paper Arbitrage-Free Smoothing of the Implied Volatility Surface, from Matthias R. Fengler (https://core.ac.uk/download/pdf/6978470.pdf).
The problem I want to solve is much simpler ...
7
votes
3answers
3k views
Forward implied volatility
Can one price accurately by only using vanilla options a derivative that is exposed/sensitive mainly to the forward volatility ?
If it is impossible, why do we hear sometimes "being long a long ...
1
vote
0answers
71 views
Effect of Volatility Regime on Volatility Smile
For short-term FX options, I find empirically that the degree of curvature of the smile (OTM/ATM in %) is higher in low volatility environments. Similar results are found by Pena et al. ("Why do we ...
2
votes
1answer
64 views
Literature on quoting vol surfaces in the absence of listed option prices [duplicate]
What are some of the modern methods used to price equity volatilities "the most accurately possible" when there are very few listed derivative prices available or even none at all? Do the pricers in ...
1
vote
0answers
106 views
Question about derivation of SABR volatility formula in original paper 'Managing Smile Risk' by Hagan et al
I have a question regarding the starting point of the derivation of SABR volatilities formulas in the appendix of the famous paper 'Managing Smile Risk' by Hagan et al.
To derive SABR volatility ...
1
vote
2answers
366 views
How should I convert FX Volatility Surface from one base currency to another?
This might be a very simple question but I wanted to understand how to convert FX volatility surface points which are quoted in one base currency to another currency?
Eg I have fx vol quoted in EUR ...
1
vote
1answer
110 views
stochastic vol modelling not enough for smile
It seems in practice models that include Stochastic Volatility alone do not have enough power to produce actual observed implied vol surfaces. Is there recent empirical literature documenting this?
3
votes
1answer
315 views
Mixing Black Scholes with SABR
I am new to the whole concept of stochastic volatility so I am experimenting with option pricing. I think the concept is really difficult to understand / grasp.
I was wondering if the following ...
5
votes
1answer
669 views
SSR definition in Bergomi in relation to sticky strike and sticky delta
In Bergomi [Stochastic Vol Modelling] (Sec. 2.5.2), in the section on surface dynamics, the following definition of the "Skew Stickiness Ratio" (SSR) is made:
$$ SSR = \dfrac{1}{\mathcal{S}_T}\frac{d\...
4
votes
1answer
613 views
MTM Hedging Performance of Vanna-Volga
I was wondering how well Vanna-Volga (VV) Implied Vols "perform". So I experimented with the following option parameters
$$S_0=100,\ K=92,\ r=0.03,\ q=0.01,\ T=2$$
and VV parameters
$$K_1,K_2,K_3=...
1
vote
1answer
362 views
On a FX volatility smile, Is a-delta put volatility equal to (1-a)-delta call volatility?
On a FX volatility smile in terms of delta,
If I want 95-delta put vol, Is this volatility equal to a 5-delta call vol, and viceversa?
Thanks.
1
vote
1answer
409 views
Mixture models of Stochastic Volatility and Local Volatility
As far as I can see on this website the stochastic volatilty models seem to be preferred to local volatility models, mainly due to the fact that stochastic volatility is 2D diffusive process whilst ...
1
vote
2answers
1k views
Marking implied vol surface daily with sticky strike and sticky delta
Suppose that implied vol surfaces are calibrated once per month due to data restrictions (i.e. option data is only available at month end). How can a trading desk remark their vol surfaces on a daily ...
7
votes
1answer
231 views
How are the BKM risk-neutral moments derived?
I've been doing a lot of research on implied volatility skewness, and one of the most commonly cited papers I've come across is "Stock Return Characteristics, Skew Laws, and the Differential Pricing ...
1
vote
1answer
467 views
Extrapolation of the volatility smile
Are there any market practices to extrapolate the volatility smile for equities? I already have an arbitrage free interpolated call prices data and I'm looking for a method to extrapolate beyond the ...
2
votes
1answer
575 views
“Black-Scholes model implies flat implied volatility plots”?
I am a beginner in Finance and I get confused by the statement "Black-Scholes model implies flat implied volatility plots"
Here is one form of this statement: (Dan Stefanica, 150 most frequently ...
6
votes
2answers
518 views
Why is the volatility smile so important
This might seem like a dumb question.
When using a volatility model, stochastic for example, we try to calibrate it so that it fits the implied volatility smile given by the market, but why is this ...
1
vote
1answer
51 views
Shape of smile after converting to prices
I have smile data which looks like this,
but after converting the vol points to prices using black's model, i got something like this,
is this expected?
I was expecting the shape of the smile to ...
4
votes
1answer
725 views
What interpretation can I derive from an inverted volatility surface?
While pulling some reports from Bloomberg today I came across the volatility surface for NYSE: ONDK, set for an earnings call next Monday. From what I've seen before (not much, 1 month on the job and ...
7
votes
2answers
677 views
Why is there greater demand for OTM and ITM options than for ATM options?
I´m currently writing a project on volatility trading and dynamics.
The literature often states higher demand for OTM (out-of-the-money) and ITM (in-the-money) compared to ATM (at-the-money) options ...
0
votes
1answer
2k views
From Delta to moneyness or strike
If I have volatility smile quoted with respect to the delta of an option on the forward, how can I convert this delta into the moneyness or strike of the option?
Is there any bult-in function of ...
0
votes
1answer
169 views
What parameters give a smile (not smirk) in Heston?
I am trying to create a smile in Heston model, however, as of yet, I have only been able to get smirks (i.e., big negative slope ITM that flattens out ATM, and then a very small positive slope OTM).
...
1
vote
3answers
439 views
Reference: Vanna, volga, vega approximations
I am looking for a reference on how to approximate implied volatility in a stochastic model vis-a-vis vanna, volga, vega, and other model parameters, in particular the derivation of such equations and ...
3
votes
1answer
1k views
Spot and Vol Correlation in Idealised Regimes of the Volatility Surface
From http://www.globalvolatilitysummit.com/wp-content/uploads/2015/10/Santander-Volatility-Trading-Primer-Part-II.pdf it states that there are the four idealised regimes of volatility surface.
1) ...
2
votes
1answer
246 views
Why is the right part of the vol smile referred to as call skew
I often see the right part of the vol smile referred to as 'call skew'. However, due to put/call parity, this also represents skew for ITM puts. Is there a reason behind this convention?
8
votes
2answers
3k views
Arbitrage Free Volatility Smile
When ATM implied volatility is higher than OTM put and call I believe that the volatility smile is no longer arbitrage free? Why is that?
On the other hand, when ATM implied volatility is lower than ...
