5 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 - \...
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4 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 ...
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4 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 ...
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  • 5,030
4 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 ...
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  • 2,836
3 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 ...
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  • 481
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 ...
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2 votes

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, ...
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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
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.
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  • 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.
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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 ...
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