How is the FX vol smile constructed in Bloomberg?

simonwu19830816 · November 3rd, 2013, 4:58 am

Does anybody know how the FX volatility smile is constructed in Bloomberg?Thanks!

VolMaster · November 3rd, 2013, 7:04 pm

They use Vanna-Volga interpolation for most pairs (maybe Heston for EM, but not sure, i can check with them for you)

simonwu19830816 · November 4th, 2013, 2:15 am

Thanks, VolMaster!I have tried with quick recalibration in Bloomberg. It seems that Bloomberg uses 25 Delta BF and RR to construct the vol smile. I tried to match with quadratic delta vol smile construction, but failed. If you can confirm with them to see what interpolation method they use, that be greatly helpful to me. Thanks again!

VolMaster · November 4th, 2013, 4:05 am

I know that they use the 25s for strikes between the ATM and 25d strikes and 10d for the strikes of 10d-25d, lower deltas are extrapolated using quadratic spline. I will confirm with them though

giladr · December 2nd, 2013, 10:34 am

Actually they provide 2 methods: Vanna-Volga and SLV, and you can choose what px to get.Their SLV method is explained in a paper by Tataru, Fisher and Yu.