<t>Skewed vol is something observable, because people doesnt belive in the simple assumptions of b&s, right? What says correlation should be affected by the same flaws/skew? I guess the only thing one knows is the historical correlation, by some assumtions, and thats even more stochastic behavio...

Thank you quadrature, but do you have any useful comments also??You mean Oztukel and others are just doing unrealistic tecnobabbeling..., or what?

<t>Assuming constant correlation and volatility there're pricingmodels like Margrabe. However, can anyone pinpoint me to articles etc. assuming even these factors are stochastic (or in a certain level at specified prob.) ? How relevant do you consider i.e stochastic correlation to me in this case? <...

<t>Ok, to me it seems like the use of stoch vol. models would be quite arbitrarily. I mean, one tries to model a process which is highly unstable and in a way not realy observable. So I suppose this means that the calibrating to mrket would be a highly unstable process( which might be by better by j...

<t>Thanks you verify much indeed, but do know if these papers are available in the webb somewhere? I can imagine the prices would be quite different from constant bs model, but is it a model that gives prices that people do trade on/use? And is the effect on the greeks of any magnitude(would it resu...

<t>Looking at a barrieroption its very sensitive the implied volatility, if Im a seller of an otm I want as high implied as I can get and if closer to the barrier i want lower volatility as the sign of the vega changes in a constant bs model. However, isnt it possible to price it numericaly, adjusti...

Thanks,But if the first sampling point for the average is, lets say 6 months ahead from current time. Shoud I then realy define the average to equal the current share price, as you say?

<t>I've made up a code that solves PDEs for a vanilla call/put. But I cant get i right for exotics, where one needs some more state variables, so therefore I'd appreciate comments (have I missunderstood it all?):1) Suppose I have a european asian with arithmetic discrete average to start with, then ...

Thanks!

<t>In his book Paul states that if you've an asian (average strike option) with arithmetic cont. sampling. Then you can do a similarity reduction from 3 too 2 variables, V(S,I,t) -> V(S,R,t) -> I*W(R,t), R = S/I, I = integrated shareprice. He then just writes the final diff. equation. But I cant fin...

<t>Ignore Hull, it must be one of the worst books ever, actually a real pitty that students "have to" read it... He writes one result after the other, without a chance for the student to realy understand whats going on, further he teaches methods like 50 years ago... it coud have been so much better...

<t>Paul, I've been thinking a bit more on the subject. And, I see what you mean, looking at i.e. a up&out: its indeed very sensitive too what volatility one quotes. And especially, it also depens un where the barrier is in relation too the current spot price. Far away you want the vol to bee hig...

Why would the potential error be more dangerous in a pathdependent, like barrier, than for a regular call/put then?

Paul, I remmeber you stated in a paper something like: "Explicit formulas are almost only used for regular B&S, like calls & puts, i.e. never for barriers where its higly dangerous with constant volatility". But, what assumptions and modells do you recommend in those cases then?

Traders still tend tend to lack academic degrees.