7
votes
Interpolation of FX Vol Surface from non-uniform strike vs tenor grid
In the end I found that fitting a SABR smile to each tenor (borrowing a result from this answer) was sufficient to build a local vol surface that was smooth and well-behaved enough to build a variance ...
- 2,996
7
votes
Accepted
Interpolation of FX Vol Surface from non-uniform strike vs tenor grid
I tried something along these lines in Quantlib python a few weeks ago. Slightly more simple compared to your approach I think:
start with a standard delta quote convention for FX vols (10D puts, 25D ...
- 1,231
6
votes
FX smile extrapolation
This is a big industry, but here are some alternatives(as usual, the best choice depends on purpose and desired accuracy):
Fit a quadratic in delta space: $\sigma_{\Delta}=a + b \left( \Delta
- \...
- 6,204
6
votes
Why use moneyness as an axis on a volatility surface
First off, there are different types of moneyness one can use when constructing a volatility surface. Each have their own advantages.
Absolute-moneyness: using absolute spot-strike comparison as a ...
- 123
5
votes
Why use moneyness as an axis on a volatility surface
If you use constant strike, the moneyness changes as the underlying changes. Out of the money equity options tend to trade at a premium to at the money options (smiles/skew). Therefore, the ...
- 5,662
2
votes
Getting option volatility off vol surface
See the paper "FX Volatility Smile Construction,
Dimitri Reiswich and Uwe Wystup" http://janroman.dhis.org/finance/FX/FX%20Volatility%20Smile.pdf for a comprehensive construction of the FX volatility ...
- 5,632
2
votes
Three questions regarding local volatility implementation (based on the Andreasen, Huge article "Volatility interpolation")
Ok, I did some investigations, asked around and got some answers to most of my questions.
Since it might be of general interest for other people I present my findings here.
How to transfer market ...
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1
vote
How to interpolate volatility's skew using spline in Python
Use linear interpolation/extrapolation:
You are overfitting your volatility surface if you use a Cubic spline, hence giving you negative values for large strikes. In order to avoid this, you can ...
- 4,186
1
vote
Accepted
Volatility surface interpolation for Black-Scholes delta hedging
A cubic polynomial curvature would be the most simple one.Otherwise,many practitioners are actually using a Gaussian process interpolation,which is more sophisticated.
- 446
1
vote
Volatility time weights calculation
As explained in the chapter 4.4 of I. Clark, you can estimate the weights by using the typical trading volumes.
You can give more weight for dates with bigger trading volume which is logical.
- 852
1
vote
Volatility surface tenors
See https://en.wikipedia.org/wiki/Foreign_exchange_date_conventions for details. In summary expiry = T+tenor for weekly tenors and expiry = ((T+2)+tenor)-2 for monthly and yearly tenors, with all the ...
- 5,632
1
vote
Reference: Vanna, volga, vega approximations
I find Dimitri Reiswich's Ph.D. thesis quite useful when it comes to FX smile construction and market conventions. Section 3.3 is on vanna/volga method.
Also have a look at Uwe Wystup's book, ...
- 5,959
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