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SWilson
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Average Vol in Turnbull Wakeman

November 12th, 2018, 6:01 pm

In the case of the average vol for Turnbull Wakeman valuation, When dealing with a futures contract are you only using a single vol value as a point in time for the future then applying it to the M variable, or are you actually taking an average vol over the realized or observed time period like as in Fa variable? 

In other words, do you use a single vol value and then input that into M, or do you input an average vol over the time period into M?  Thanks.  
 
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Re: Average Vol in Turnbull Wakeman

November 14th, 2018, 2:06 pm

in general it is just the volatility of the underlying future contract that the Asian formula transform into a average vol (based on often unrealistic assumptions about the stochastic process of the underlying future contract). I think the original Turnbull and Wakeman formula is  is not valid for options on futures, but several modified versions are so.

Naturally many challenges here. For example if there is an European plain vanilla option on the same future contract (assuming the future itself not is an average rate future contract) but this plain vanilla expire considerably time after the average option expiry. Then it is not just to take the implied from the plain vanilla and put it into the Asian option formula. In general you want to look up liquid (plain vanilla) options and make sure the asian option is priced consistent with these (but not always). Could be many things to take into account here, part art, part science ( market specific also), in some markets asian options are more liquid than the plain vanilla (? LME on some metalls?). 
 
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SWilson
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Re: Average Vol in Turnbull Wakeman

November 20th, 2018, 8:57 pm

Thanks, this was helpful.  
 
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Re: Average Vol in Turnbull Wakeman

November 22nd, 2018, 7:18 pm

dont forget to calibrate to term structure of vol.

Asian Pyramid Power
Screen Shot 2018-11-22 at 3.50.06 PM.png
Asian volatility is a time-pyramid
 
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SWilson
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Re: Average Vol in Turnbull Wakeman

November 26th, 2018, 5:31 pm

This is exactly what I was thinking and looking for.
 
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Re: Average Vol in Turnbull Wakeman

May 31st, 2020, 10:13 am

 the European Energy Exchange claims they use my 2006 extension of the TW formula (the no vol term structure variant). I was blowing dust of and brushing up that working paper and just published a note on it

Asian options with zero cost-of-carry: EEX options on freight and iron ore futures

( a few typos I see, but easy enough to spot)

interesting how Turnbull Wakeman also refer to this optics paper

Permanence of the Log-Normal Distribution

Well optics and finance closely related! Everything is light!
 
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SWilson
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Re: Average Vol in Turnbull Wakeman

June 2nd, 2020, 3:20 pm

I'm going to re-visit this and go through your paper. Thanks Espen.
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