Quotecomposite changes vol to a basket volInteresting you should say that -- for heavily path-dependent options, the difference in pricing between simulating a composite underlying as a basket and simulating the equity and the FX separately can be quite staggering.

Link?

Hang on -- doublebarrier2000 is wrong. 'Long skew' means that you want skew to increase, not decrease.Long a risk reversal is long the skew; the position you're describing is short a risk reversal, hence short skew. (doublebarrier2000 got that bit right.)

The latter.

One typically uses 1/24 = 4.1667%. Don't ask me why -- if I find out the reasoning, I'll post here.

Check the put-call ratio, for one thing.

<t>Hello,A few questions:1) Is it just me or does no one seem to be using BGM models? I've been talking to dealers a lot the last few weeks and it seems most are using Markov-functional models or -- gasp! -- 2-factor H&Ws for things like Canary/Bermudan swaptions. I certainly understand that som...

<t>They're right -- the strike for your coterminals should be the appropriate forward swap rate. Note that 1-factor HJMs can't produce skew, so if you're using the same absolute strike for each swaption, you are either a) calibrating to the wrong implied for some of your swaptions or b) dealing with...

<t>BGM is probably overkill for equities. It has some use in commodities where forwards are substantially decorrelated, but in equities, 1-factor models (or 2-factor models as with Heston) are typically sufficient. That said, Heston-type models get prices for complex structures like Napoleons wrong,...

amit7ul / bazman2: the paper sounds very interesting, do you know when it was published? I might be able to help you get a copy...

<r>These papers address just this issue:<URL url="http://www.numdam.org/numdam-bin/fitem?id=SPS_2001__35__149_0http://www.math.nyu.edu/research/carrp/papers/pdf/FRLarticle.pdf"><LINK_TEXT text="http://www.numdam.org/numdam-bin/fitem? ... rticle.pdf">http://www.numdam.org/numdam-bin/fitem?id=SPS_2001...

> 1 implies a thing about slope of vol versus k graph (fancy name: monotonicity)> 2 implies a thing about curvature of vol versus k graph (fancy name: convexity)Hmm...those are both the same thing actually (both are convexity checks)For 1, I think you mean vol versus moneyness.

<r>I've got a copy of this at work: <AMAZON id="9810235216" url="http://www.amazon.com/Exotic-Options-Guide-Second-Generation/dp/9810235216/ref=pd_bbs_sr_1/002-7571274-2710451?ie=UTF8&s=books&qid=1187123431&sr=8-1It"><URL url="http://www.amazon.com/Exotic-Options-Guide-Second-Generation/...

<t>Am I insane to think it's overkill for first-order greeks? In fact, isn't it possible to construct a fairly large universe of linear derivative contracts (wrt to first-order greeks, and other than your standard forward/put/call), all of which would be analytic? If anyone has any thoughts on what ...

farmer++ (for irony)