QuoteOriginally posted by: list1QuoteOriginally posted by: frolloosQuoteOriginally posted by: list1One thought that might come with LV concept. Local vol deals with the same option price as it presented by BSE. In a simple version LV presents volatility of a theoretical not the real underlying of the option in ( T, K ) coordinate space and nothing more than that. Thus if one receives an adjustment to BS option price then it is formally incorrect even when LV establishes statistically more reliable estimate. Such adjustment is an argument that BS option price does not close to the market premium for specified period. The same conclusion holds for any other pricing adjustments like calibration. Practical closeness to real data does not a formal argument in favour of the adjustment is formally correct.You are confusing, not for the first time, the concepts of local vol and implied vol. The reason for that is possibly the common notation, [$]\sigma(K,T) [$] for local vol, which is also used for implied vol. But they really are different (although related) things.frolloos, I could confused, not for the first time but it seems that implied volatility is calculated for the fixed T, K and therefore it uses the option data for the dates [$]t_k[$] , k = 0, 1, 2, ... which show that we are in ( t , S )- coordinate space and not in ( t , K ) which correspond to loc vol dynamics.I don't know where or how to start explaining. I really think it is a language issue, don't take that the wrong way. If I, with my childish PDE and probability skills can get at least a basic understanding of option pricing, you should definitely be able as well. So if I were you, try to find a good book on option pricing in your mother language.
Last edited by frolloos
on June 30th, 2016, 10:00 pm, edited 1 time in total.