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Using local vols to reprice vanilla options..does it work?
Posted: May 19th, 2014, 5:40 am
by koolad
Hi,If we were to reprice vanilla options using a local vol surface using the same prices it had been constructed from..shouldn't they match?What is the best possible approach to go about local vol pricing.. as in not only constructing the surface but also pricing the options.. Any papers available?Thanks..
Using local vols to reprice vanilla options..does it work?
Posted: May 19th, 2014, 6:08 am
by secret2
It should. However, more likely than not, smoothing would be performed on the calibrated local vol surface (differentiation in calculating local vol results in choppy cruve). Hence it would not recover vanilla prices perfectly.
Using local vols to reprice vanilla options..does it work?
Posted: May 23rd, 2014, 12:51 pm
by berndL
For a numerical calibration there is this paper:Tavella, D. & Klopfer, W. - Implying Local Volatility (2001)Pops up if you search at your favorite engine.