6
votes
Which models do Bloomberg/Reuters use to derive implied volatility for interest rate derivatives with negative forward rates?
Short Version
Market standard is to use Normal Vol (used in the Normal / Bachelier model)
Market data comes from contributors like Tullett, ICAP and the like and can be premium and vol quoted etc.
...
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6
votes
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Is variance swap long volatility of volatility?
My two cents:
Let's agree that a derivative is long an underlying if the payoff of the derivative increases with the price of the underlying $S$.
Then buying a variance swap is going long the ...
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6
votes
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What does implied volatility say about the underlying?
A vol surface displays implied volatilities (IVOL) for various tenors and strikes. It can be displayed in several ways, with the two most common being:
Moneyness
Delta
Interest rate options are a ...
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6
votes
Is variance swap long volatility of volatility?
What about the following argument: a variance swap can be replicated with a portfolio of vanilla options, nearly all of which are out of the money (OTM) . But it is well known that OTM options are ...
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6
votes
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Bartlett's delta gives wrong signs for calls and puts
Bartlett's delta as computed in your code is a simple finite difference (FD), also called bump and reprice, of the Black values. I do not think there is anything wrong here, besides the fact that you ...
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5
votes
interest rate, dividend rate data for black scholes model
The experts on this issue are the people at the CBOE who compute the VIX volatility index. I suggest you use the same methodology described in this document Cboe Volatility Index Mathematics ...
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5
votes
interest rate, dividend rate data for black scholes model
The interest rate can be derived from put call parity. A number of questions about how to do this have been asked, for example this one but look at related questions as well.
For European options ...
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5
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How to structure a trade using vanilla equity options to get vega exposure to forward volatility?
Let $I(K_1)$ be the IV of a vanilla option with strike $K_1$ and maturity $T_1$ and similarly $I(K_2)$ corresponds to strike $K_2$ and maturity date $T_2 > T_1$.
What I'd suggest you try to trade ...
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5
votes
Is variance swap long volatility of volatility?
Since the variance swap is linear in variance. Its local volatility exposure is 2σ, with second derivative = 2. If one was to hedge this local volatility exposure using options or a volatility swap, ...
- 749
5
votes
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Option Pricing for Illiquid case
Warning upfront: I have NO experience with crypto currencies. I believe I do have a relatively decent experience with options in general though. What follows will be a generic explanation, largely ...
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4
votes
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Smile wings and varswap pricing
The main concern is usually for the far wing where strikes are low.
Variance swaps have a theoretical replication. The fair variance swap strike $K_{var}$ is computed as
$$ K^2_{var} = \frac{2*e^{rT}}...
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4
votes
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Converting implied volatilities into digital option prices
In the simplest case, you can just assume a flat vol Black Scholes world. In this case, using the usual BS notation, the fair price of the cash or nothing option is e^(−rt)*N(d2) which is the ...
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4
votes
Why does the volatility smile flatten as maturities increase?
A wee bit late to the party but still worth posting an answer I think, especially since this question appears to be the only one asking why the IV flattens as $T \rightarrow \infty$. Furthermore, I am ...
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4
votes
Is negative forward variance an arbitrage?
Let
$$
V_t^{T_1,T_2}=\frac{(T_2-t)V_t^{T_2}-(T_1-t)V_t^{T_1}}{T_2-T_1}
$$
be our forward variance where $t<T_1<T_2$, $V_t^{T_1}$ is the ATMF implied vol as seen at time $t$ for slice at maturity ...
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3
votes
implied-information in american option
I observe that Christoffersen et al. (2012) consider the implied volatility from European options, as calculated under the BS model and other extensions of it. Therefore, implied volatilities from ...
- 1,396
3
votes
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Volatility swaps hedging
Although this question seems Taylor-made for me, I shall resist promoting my own work and refer you instead to Carr and Lee's seminal paper Robust replication of volatility derivatives.
Basically what ...
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3
votes
Does skew flatten with a decline in volatility?
The description by Bennett is not very clear, but the reference to the Figure 103 in the text at the end of the paragraph that you cite should resolve the issue.
Bennett is saying that once the sudden ...
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3
votes
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How does a volatility surface based on moneyness instead of strike stay consistent with put-call parity?
If you have a moneyness surface, moneyness is usually defined the same way for calls and puts. I have seen in another question from you that you use Bloomberg. On ...
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3
votes
Volatility Forecasting
From what I have seen yes. Yang & Zhang showed that their estimator is less biased and less volatile compared to the close-to-close estimator.
However, as mentioned, high-frequency data is ...
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2
votes
Value of Call Option as Volatility goes to Infinity
When you delta hedge, you make a PnL equivalent to gamma times the difference between implied and realized vol. You want on average the realized vols to average out to the implied vol, in a central ...
- 1,875
2
votes
2
votes
Calculating PnL of Options strategies with Volatility Surface
The function that converts option prices and implied vols is bijective. So yes, you can compute the PnL given you have the volatility surface and you know the parameters that where used in its ...
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2
votes
Strike of a Variance Swap in a Sticky Strike World
The fair strike computed via replication equals the integral of weighted prices of out-of-the-money options over all strikes. As you wrote correctly, these weights are being inversely proportional to ...
- 8,143
2
votes
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Filtering options data
It's possible they want you to remove short dated options as the vol of implied volatility increases. In real price terms this isn't visible as much, that's because $\frac{dC}{d\sigma_i}$ decreases ...
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2
votes
Heston Calibration - how far OTM can an option be before it's not considered ATM anymore?
A1: Volatility implied by what model? :)
A2: Check what the volatility smile is and how it affects your model.
UPD:
As @frido insisted, I would add more details.
"Why not 1 year IV"
Because ...
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2
votes
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Optimal Fitting Criteria of SABR
In practice (at least in the rates world), $\beta$ is preset and $\alpha$ is solved for to calibrate to the atm vols $\sigma_{ATM}$ (which are the most liquid and reliable of the market data available)...
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2
votes
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Vanna Volga Price of an Up and In Put
I do not think you should (can) use the opposite probability (going from p touch to p no touch) because there exists a so called In-out parity: $$European \ vanilla\ option = European\ KI + European\ ...
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2
votes
Calibration of Heston using implied vol as $v_0$
Using the ATM implied vol of short term options is indeed a common practice for $v_0$ as in your Scenario 2. Linear interpolation should be enough, given that 1 week is somewhat arbitrary anyway. In ...
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2
votes
What's wrong with calibrating implied volatilities with polynomials?
First of all, you don't calibrate IVs. You interpolate and extrapolate IVs in order to calibrate a model.
There is nothing wrong with interpolating and extrapolating with polynomials, as long as no-...
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votes
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If there was a way to back out implied volatility (IV) from a stock, would it be the same as the IV backed out from an option on that same stock?
Yes, IV is indeed possible, at least in theory, to back out of stock prices. This lies, I would say, in the core of the so called structural bond models, which, as far as I know, started out with ...
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