Why future (forward) volatility smile is important to path dependent option?

gcgamet · March 31st, 2015, 10:21 am

I was wondering why future volatility smile is important to path dependent option and American type option such as Bermudan swaption. It would be best if someone could provide a reference article as well.Thanks!

Alan · April 3rd, 2015, 1:35 pm

I would put it this way.Most path-dependent options and American-style options are their own creatures and their values cannot be deduced fromvanilla Euro-style options, even given a complete set of strikes and maturities. This is a fact of life. It is also true that similar factors, such as stochastic volatility influence both future smiles and the values of the options you ask about.

gcgamet · April 4th, 2015, 6:57 am

Thanks Alan! That really helps.