Technical paper/Implied volatility
The vanna-volga method for implied volatilities
Cutting Edge - Option pricing
The vanna-volga method for implied volatilities
Option pricing
Smiling at convexity
The price of a constant maturity swap (CMS)-based derivative is largely determined by the value of swaption volatilities at extreme strikes. Fabio Mercurio and Andrea Pallavicini propose a simple procedure for stripping consistently implied volatilities…
Smiling hybrids
Vladimir Piterbarg develops a multi-currency model with foreign exchange skew suitable for valuation and risk management of forex-linked hybrids, in particular power-reverse dual-currency (PRDC) swaps. The emphasis of the article is on model calibration…
An arbitrage-free interpolation of volatilities
Nabil Kahalé describes a new construction of an implied volatilities surface from a discrete set of implied volatilities that is arbitrage-free and satisfies some smoothness conditions. His method provides an excellent fit to the smile of the local…
Practical relative-value volatility trading
The rapid growth of fixed-income hedge funds has resulted in increased interest in identifying relative-value trade opportunities. Here, the author presents a consistent framework for finding value within interest rate options markets.
Reconstructing volatility
Options on stock baskets have become a mainstay of the equity derivatives business, but pricing and hedging of such products is highly sensitive to implied volatility and correlation assumptions. Here, Marco Avellaneda, Dash Boyer-Olson, Jérôme Busca and…
Reconstructing volatility
Equity derivatives
Mean-reverting smiles
Commodity markets such as crude oil exhibit mean reversion as well as option smiles. David Beaglehole and Alain Chebanier meet this challenge, constructing a model suitable for pricing exotic options in these markets
Pricing default baskets
Nicholas Dunbar, Risk’s technical editor, introduces the first in a new series of technical papers written by quants at Deutsche Bank.“Default correlation has been one of the hottest topics in credit derivatives over the past year. So it is a pleasure to…
Crises and volatility
Stress testing
The taming of the skew
Implied volatility
A mixed-up smile
Implied volatility
Swaptions with a smile
Masterclass – with JP Morgan
The tree of knowledge
Options
Rates of skew
Interest rate models
If the skew fits
Volatility
Regimes of volatility
Options markets
Pricing with a smile
Bruno Dupire shows how the Black-Scholes model can be extended tomake it compatible with observed market volatility smiles, allowingconsistent pricing and hedging of exotic options