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vanna-volga
What is the context ?
vanna-volga
My 2 cents:vanna= d(vega)/dSvolga= d(vega)/dSigma-- Kokoon --
vanna-volga
i saw it from Bloomberg.... one of the pricing model other than black-scholes and heston for pricing barrier options...can anyone explain what's that??
vanna-volga
Roughly, You get a smile impact by creating a portfolio of Vanilla options with the same volga and vanna (and as well vega) as your exotic, then say that the smile is the same for that portfolio as for your exotic. Intuitively it's approx. the hedge cost of the vol. risk. But not so good a model for barrier options I wouldn't have thought.I have an idea there are other threads on this model (which probably explain it better than above!).
Last edited by sgnihctuH on June 27th, 2006, 10:00 pm, edited 1 time in total.
vanna-volga
It seems it is just a pricing/hedging method taking into account the dynamics of the volatility. Examples can be found in : http://workshop.mathfinance.de/2006/pap ... ent.pdfThe underlying idea is to hedge the Vega, Volga and Vanna of the barrier option via vanillas.
