Questions tagged [volatility-smile]

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7
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618 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 ...
6
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0answers
122 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\...
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0answers
112 views

Why SVI does not fit well short-maturity options?

As I understood, the SVI is widely used among practitioners. However, it is mentioned in many published papers (including ones written by Gatheral), that the SVI model does not fit well short-maturity ...
2
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0answers
75 views

Hagan et. al original argument for SABR

In the original SABR paper (Hagan et al 2002 ), the introduction of the famous model is motivated by the observation that local volatility models spot dynamics work the wrong way. As the spot ...
2
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0answers
181 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 ...
2
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0answers
194 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
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0answers
113 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 ...
2
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0answers
92 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 ...
2
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0answers
405 views

Vol surface changes as underlying moves

We market make in highly liquid, near term options markets. I want to build a risk report that tells us how our portfolio's greeks will change as the underlying moves. This is for risk management in ...
1
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0answers
33 views

Non-Trivial ATM Volatility in Vol smile construction from Market data on US Equities

have 2 quick questions please help. Constructing vol smile (OTM puts & OTM calls) from US equity market data. for Parabolas fit or other methods, the choice/method for ATM vol is non-trivial, ...
1
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0answers
30 views

Terminology : definition of skew for a volatility smile

Is there a generally accepted definition of skew for volatility smiles? Is skew always defined as $$ \frac{\partial{\widehat{\sigma}(K,T)}}{\partial{K}}, $$ where $\hat{\sigma}:[0;+\infty)\times[0;+\...
1
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0answers
54 views

FX Smile Polynomial Fitting

I am unable to reproduce the example of FX polynomial smile interpolation on page 59 of the book FX Option Pricing by Iain Clark shown below. Consider just the ATM volatility as a specific case. I ...
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0answers
58 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 ...
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58 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 ...
1
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0answers
156 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
74 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 ...
1
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1answer
98 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 ...
0
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0answers
32 views

How does the real market calculate the option prices when strikes are very small?

I'm working on the S&P500 European index options data(call options). On 2017-10-23, we have the closing price as 2564.98, and risk free rate is 1.09%(3 months treasury bill). If I choose the ...
0
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0answers
30 views

Looking for a math description of upside/downside implied vols - does Dupire help?

This is in continuation of this post which explained the meaning of the vols in the vol smile as follows: Suppose you have a downsloping vol smile. Then, the fact that the vol is higher on the ...
0
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0answers
18 views

How can I extrapolate a Smile curve of Maturity T for a longer maturity T+1>T

I have a interpolated vol smile curve for maturity 2 years and I would like to extrapolate it to a 5 years.