<t>Do you know whether there is a well accepted market practice for model provision calculation methodology?In my understanding, the provision is the valuation adjustment which comes from factors which is not taken into account in the pricing model.Typical example is the correlation provision.For th...

<t>Hi Wilmotters;Does anyone know how to calibrate a hybrid model when ccy and tenor basis exist?Let me use a BS-HW-HW as a toy model:dS / S = (r_d - r_f) dt + sigma dW_1d r_d = a_d (theta_d - r_d) dt + sigma_d dW_2d r_f = a_f (theta_f - r_f) dt + sigma_f dW_3When there are no basises, we can easily...

<t>I am trying to hedge barrier options under stochastic volatility models.I tried the following two strategies.1.Risk minimizing delta hedgeDelta is defined to minimize the variance of the hedging error.The hedging cost is equal to the conventional price which satisfies an ordinary PDE used in SV.2...

<t>"back bone" is a naive concept for capturing the ATM dynamics.But, "back bone" does not capture the ATM dynamics. if beta equal to 1 or \rho \lambda is large. Here, \lambda is the strength of vol of vol compared to the local volatility, which is Eq.(3.1b) in the original Hagan paper.As Bartletts ...

Bartlett delta is appropriate, if SABR is consistent with the actual market.As Rebonato's book shows, you can minimize the variance of P&L from delta hedging.Bartlett's delta is also recommended by original authorsBartlett's paper is written by Patrik Hagan and Andrew Lesniewski.