Questions tagged [volatility-surface]

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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) ...
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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 ...
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Approximating SPX index skew using PutDex & CallDex

I hope someone can help me with this. As I don’t have access to historical options data I am wondering if it is possible to deduce SPX options skew from various volatility indices - in particular ...
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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 ...
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How would one construct a volatility surface given only the spot price?

The traditional way to build a volatility surface is to pull options data and then do some form of interpolation. What happens if there is no existing options market and only a spot market for asset X?...
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"Back-Transforming" Smile Strangle into Market Strangle

I was wondering on whether FX vol experts here can comment on the following question: Suppose I have a properly stripped FX vol surface, which I constructed from ATMs and by market standard ...
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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/...
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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 ...
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Implied volatility surface of an average rate Asian caps

Lets say I have a SABR model where implied volatility is given by semi-analytical Hagan et al. formulas and individual caplets are priced with analytical Black formulas. This model allows me to ...
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May banks ignore the vol surface for far OTM, distantly-dated options, and make risk decisions only on near-term implied ATM vol?

Here is a difficult "real-life" skew / surface options problem that actually occurred. Please help me judge its validity or falsity. In 2018 a Chinese communications stock was falling, and ...
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Statistical metric to measure how well does the volatility surface fit the market

Suppose that I have a model for implied volatility surface and want to figure out required recalibration frequency based on historical quotes. Since I have a large range of strikes and tenors over a ...
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No-arbitrage conditions on a caps/floors volatility surface

Suppose that one has a caps/floors volatility surface and wants to check whether this surface admits arbitrage. What is the theoretical and practical way to do it? Lets talk only about caps for ...
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QuantLib Python - stripped caplet volatilities as input

My market data source provides me with already stripped caplet volatilities as a matrix with strikes in one dimension and caplet maturities in the other dimension. Is there any way to put these caplet ...
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Should one calibrate SABR model on caps or caplets?

I want to build a volatility surface for caps on a 3M index implied from SABR model. I have a set of cap normal volatilities for a range of strikes (4%, 6%, 8%, 10% and ATM) and maturities (1, 2, 3, 4 ...
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How to build a volatility surface for caps from the SABR model?

My end goal is to build a volatility surface for caps. It's well known that SABR model has Hagan approximation formulas for log-normal and normal implied volatilities of options, e.g. caplets, ...
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What interpolation methods are standard to use for interpolating on equity volatility surfaces?

The answer to this question (Volatility surface interpolation for Black-Scholes delta hedging) names Cubic Spline Interpolation and Guassian Process interpolation (is this exactly the same thing as ...
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1 answer
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How to parameterising Greek Surfaces?

I'm currently working on my master thesis, where I have data on option trading volume and flow (number of shares bought minus sold; i.e., net position), divided among three kinds of market ...
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Vega Surface with Local Volatility Model

I am trying to obtain the Vega of some equities with the Dupire local volatility model. For this I have already validated the pricing model (I am using Monte Carlo) and now I am able to obtain the ...
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Handling different periodicity and expiry times of options for inclusion to volatility surface construction

I'm curious to know if considered "incorrect" to include (i) weekly, monthly and quarterly options, and (ii) options with different expiry times during the day? Feels to me differing ...
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Volatility surface interpolation for Black-Scholes delta hedging

A general question for interpolation method for implied volatility between tenors. I've recently stumbled accross a dataset from http://www.math.ku.dk/rolf/Svend/, and I would like to interpolate the ...
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Implied and Local Volatility relation in Monte Carlo

I am implementing a Monte Carlo engine with the local volatility model based on Dupire. Obviusly, I obtain the local volatility surface from the implied volatility surface and that surfaces has ...
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1 vote
2 answers
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Theoretical and practical drawbacks of using Deep Learning for calibration and pricing

I am investigating the suitability of using deep learning for pricing and calibration for the full implied volatility surface. Such examples of their application are in papers here and here. During ...
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1 answer
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Dupire (Local Vol with Imp Vol)

I am trying to implement a local volatility pricer using Monte Carlo and Dupire's equation in function of implied volatilities and I was told that first of all I have to check Dupire is well ...
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What's a sensible way to measure correlation in the volatility surface?

Lets say I construct a parametrisation of the volatility surface that lets me infer dynamics i.e correlation between strike vol. Is computing the sample correlation (after controlling for spot-vol ...
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1 vote
1 answer
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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 ...
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2 votes
1 answer
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Does shifting/scaling the IV surface relatively/absolutely introduce arbitrage?

I am fitting a volatility surface for vanilla call options. I do this by fitting low-degree polynomials (or cubic splines) along the strike dimension per maturity and then linearly interpolating ...
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Warrant volatility surface differs for each issuer

I have written a rudimentary program for fitting volatility surfaces for warrants of call and put options for the purpose of some basic scenario analysis. In my country, trading options privately in a ...
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How to interpolate on an implied volatility surface based on forward moneyness?

Should be a simple matter, but perhaps I'm misunderstanding something fundamentally. Look first at the below image of the BVOL surface from Bloomberg, to my understanding from looking at the white ...
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2 answers
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Why use moneyness as an axis on a volatility surface

A simple volatility surface might have X axis = strike, Y axis = expiry and Z axis = implied volatility. But in many papers I see them use moneyness instead of strike. I have two questions. Why do ...
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1 answer
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Newbie question on volatility surface building

I am trying to build a prototype equity volatility surface for pricing european call options, as a way of learning a new programming language that I am looking at. Is there anything wrong with the ...
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1 answer
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Is the moneyness of a barrier option based on the strike value or the barrier when mapping to a volatility surface?

Say you have a down and in put barrier option with a strike of 100 and barrier at 60. If the stock price sits at 90, which value would you use to determine the moneyness? Is the option in or out of ...
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Hedging : effect of not matching the term structure of skew

Let us assume that we construct a pure stochastic volatility model calibrated to the implied volatility surface, but that the model does not replicate accurately the observed term structure of the ...
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1 vote
1 answer
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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, ...
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4 votes
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$\frac{\partial C_{BS}}{\partial T}$ in local volatility derivation in terms of implied volatility

In Gatheral's book, in the derivation of local volatility in terms of implied volatility, we use the regular Dupire formula $$ \frac{\partial C}{\partial T} = \frac{1}{2} \sigma^{2}K^{2}\frac{\partial^...
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Implied Volatility vs Actual Volatility Calculation

To build a term structure I need different volatilities; as I don't get them at every strike, I use interpolation technique to calculate the rest and plot. This is how I calculate the implied vols. ...
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3 votes
1 answer
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LIBOR market model with stochastic volatility

I have read that there are 3 types of pricing models: local volatility, stochastic volatility and stochastic-local volatility models (LSV). I am now looking at interest rates exotics pricing models ...
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3 votes
2 answers
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Interpolation of FX Vol Surface from non-uniform strike vs tenor grid

TL;DR I'm trying to fit a vol surface to market FX options quotes in order to build a local vol model to price with. Unlike listed options that typically have a nice rectangular grid of strikes and ...
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2 votes
1 answer
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simulate volatility surface

Assuming I have a stochastic volatility model for an asset, if I wanted to use it for pricing I would proceed in the following way: Use Euler discretization to simulate a sample path of the price and ...
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3 votes
1 answer
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Options when there's no VolSurf - Emerging/Frontier Markets

Context: Most emerging/frontier markets have no or very thinly traded volatility surfaces for their equity markets (single name and indices alike), furthermore, they usually have restrictions on Short-...
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1 answer
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Book/ Articles recommendation for Volatility models

I am looking for references on volatility models. I want to gain more insights on these models but have a little background as of now. Thus, looking for references that can pick the topic from basics ...
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How do we compute FX volatility for any given FX strike and time to maturity?

I want to implement a function which is passed two inputs: a strike and a time to maturity (which can be arbitrary within a specified range) and returns an FX volatility for this strike and maturity ...
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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;+\...
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2 votes
1 answer
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FX convention and volatility calibration

In general, call/put options are quoted with respect to their Black-Scholes volatility. In the FX market we define the risk reversal volatility as $$\sigma_{25-RR} = \sigma_{25-Call} - \sigma_{25-Put}...
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What is the use of implied volatility, the skewness and its surface? [closed]

I am leaning about options, saw various video lectures and read some literature including John C Hull. After a while I forgot where I started and where I am currently and I unable to connect dots. The ...
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What is the use of volatility surface and how do traders use it? [closed]

I was going through a use case where At time $t_{t}$, the price of a call option is $C1$ and the price of underlying stock is $S1$ At time $t_{t+1}$ day, the price of a call option is $C2$ and the ...
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3 votes
1 answer
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FX ATM-volatility quotes

Is the implied volatility ATM the same for a currency pair as for the inverted currency pair. I.e, can I expect the same volatility quote ATM for (for an instance) EURUSD as for USDEUR? And does this ...
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3 votes
2 answers
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What does it mean to "calibrate vols"

As a beginner, it can sometimes be hard to discern what different terms and phrases mean in QF. I've heard multiple people such as academics and market-makers say things like "calibrate vols" or "...
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How to extrapolate shorter tenor from volatility surface?

Overnight(ON) volatility is the first input of a volatility surface, 1 weeks, 2 weeks and so on... Say I have a volatility surface with ON expiry of 1 day, is there anyway to extrapolate volatility ...
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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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1 vote
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Swaption Vol surface

¿How can I get the implied vol from a swaption when I have a vol surface with the maturity of the option and the tenor of the swap? For example I want to know what is the volatility for a swaption ...
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