Practical EQD var/vol swap pricing
Posted: December 26th, 2011, 12:26 pm
Hi there, Merry X'mas and happy new year 2012. 1) I understand though the impact of implied vol/var get less and less when time-to-maturity approaches zero. (MtM dominated by realized vol/var). Nevertheless,there may not have enough short-dated maturity high/low strlkes option how to do replication (varswap case) and stochastic-vol calibration (volswap case). In such case, the implied vol/variance MtM part is very crude and inaccurate. What's common methods to circumvent such case when option quotes are not available ? 2) Does trader/structurer quotes price based on Derman replication? Or any adjustment is required before showing any pricing ? Seems to me the derman replication theoretical fair strike is very different from broker's quotes. 3) Pertaining to above, low strike put prices can be obtained by CDS price. (or I heard by Heston'smodel to arbitrary insert those prices). Is there any empirical result how many vol points the strike is different by missing off those low strike quotes ? 4) In single-stock case, the strike range should be twice that of index options (since vol. is ~ twice). I also heard something like single stock option price is american style. So what can I get back the european option price ? What else should one be aware of ? cheers,