Serving the Quantitative Finance Community
Volatility measure in outperformance options
Hi,I am evaluating a client's model for pricing outperformance options. I noticed that he is using historical volatilities and correlations in his calculation. When I asked him why he wasn't using implied volatilities, he said that as he was using historical correlations it made sense to use historical volatilities as well, as it would lead to inconsistency to use implied vols with historical correlations. What do people think about this, is this correct what is the convention for instruments like this?Thanks,John
-
- quant99trader
- Posts: 0
- Joined:
Volatility measure in outperformance options
He should be using implied if available. In doing so he is consistent with market prices. If the correlation parameter is uncertain and cannot be implied from market, then at least you can derive a range of plausible prices consistent with the market. I think your client is wrong.
Volatility measure in outperformance options
Yeah that would be my thinking on it as well, thanks for you thoughts.John