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by LocalVolatility
June 24th, 2009, 9:33 pm
Forum: Technical Forum
Topic: SABR for equities
Replies: 1
Views: 39004

SABR for equities

<t>SABR works quite well for equities if you fit the model to the different maturities separately - you will not get a good global fit though (in the sense of fitting one set of parameters to the whole surface). But this is mentioned in the SABR paper as well. Drift is not a problem as the model is ...
by LocalVolatility
June 24th, 2009, 9:16 pm
Forum: Student Forum
Topic: Bull Call Spread sensitivity to volatility
Replies: 4
Views: 39035

Bull Call Spread sensitivity to volatility

<t>I guess the most simple explanation you can give: Image you are long this spread, the stock is below the strike and volatility is zero - then your chance of getting a non-zero payoff (ignoring the drift) is zero. Increasing the volatility increases your probability of ending up with a non-zero pa...
by LocalVolatility
June 24th, 2009, 9:09 pm
Forum: Student Forum
Topic: CDF & PDF of stock price (geometric motion)
Replies: 1
Views: 37926

CDF & PDF of stock price (geometric motion)

<t>If you want to calculate the probability of the (continuously compounded) return being bigger than x then you can directly work with the PDF / CDF of the yields. And you know that these are normally distributed with mean = mu * T and variance = sigma^2 T. So just go for NORMDIST in Excel or in C+...
by LocalVolatility
June 14th, 2009, 10:48 pm
Forum: Student Forum
Topic: Continuously monitored Barrier Options (MC / FD)
Replies: 0
Views: 37389

Continuously monitored Barrier Options (MC / FD)

<t>Hi there,if have two related questions on the numerical pricing of barrier options:(1) When pricing a continuously monitored barrier option with a Monte Carlo simulation, I know that I have to account for the fact that I am actually only performing a discrete sampling. In the BS framework, there ...
by LocalVolatility
June 14th, 2009, 4:42 pm
Forum: Student Forum
Topic: Local Vol. as a Function of Implied Vol. / Gatheral's Book
Replies: 8
Views: 42318

Local Vol. as a Function of Implied Vol. / Gatheral's Book

<t>Hi,seems like this has been treated in these two papers:Andersen, Brotherton-Ratcliffe; The equity option volatility smile: An implicit finite-difference approach; Journal of Computational FinanceDempster, Richards; Pricing American options fitting the smile; Mathematical FinanceDoes anybody have...
by LocalVolatility
May 27th, 2009, 5:46 pm
Forum: Student Forum
Topic: FX Modelling
Replies: 1
Views: 39698

FX Modelling

<t>I can recommend Uwe Wystup's book "FX Options and Structured Products".Coming from an equity derivatives background, this book helped me a lot to get a grasp of how the "FX world" works. It starts with a describtion of the FX market and the quoting conventions - e.g. quoting options in terms of d...
by LocalVolatility
May 27th, 2009, 3:17 pm
Forum: Student Forum
Topic: Local Vol. as a Function of Implied Vol. / Gatheral's Book
Replies: 8
Views: 42318

Local Vol. as a Function of Implied Vol. / Gatheral's Book

<t>Hi there,I am currently reading Gatheral's book "The Volatility Surface" (alternatively search for his lecture notes - they are pretty similar). I am having trouble writing down his derivation of the local volatility in terms of the Black-Scholes implied volatility.1) He is starting with the Dupi...
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