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xingwei86524
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Posts: 19
Joined: April 11th, 2018, 8:06 pm

Option pricing in SABR model

April 17th, 2018, 6:21 am

Hi,

I am new to the SABR model, and I have read in a few articles that option prices (call options on forward rates) in the SABR model are given by the Black formula.

This seems like a rather surprising result, considering that SABR is a stochastic vol model.  In the Wikipedia description, it states that "we force the SABR model price of the option into the form of the Black model valuation formula. "

So I am a little lost on what is happening here.  Can someone explain to me what is going?

Many Thanks
 
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Gamal
Posts: 1284
Joined: February 26th, 2004, 8:41 am

Re: Option pricing in SABR model

April 17th, 2018, 9:03 am