Forward Volatility

Adamm · September 26th, 2005, 4:48 am

I am trying to find a formula for determining forward volatility using the volatility smiles of shorter dated options. Assuming 6 month and 1 year options are trading actively and the skew is fairly apparent, how can I use these skews to determine the two year volatility surface?ThanksAdam

doublebarrier2000 · September 26th, 2005, 2:02 pm

Hi Adamm. Generally Forward vol describes the vol between 2 points in the future, ie the 1 yr vol that would occur in 1 years time. From your question it looks like you are talking about extrapolation.

Adamm · September 27th, 2005, 6:10 am

Hi ThereI am talking about extrapolation of Vols. I realise that linear extrapolation wont work and I was someone could recommend something.ThanksAdam

archimg · September 27th, 2005, 7:38 am

QuoteOriginally posted by: AdammHi ThereI am talking about extrapolation of Vols. I realise that linear extrapolation wont work and I was someone could recommend something.ThanksAdamI would extrapolate according to some simple functional form (some exponential)