Local Volatility

Counterexamples for FX Options Interpolations – Part I ArXiv ID: 2512.19621 “View on arXiv” Authors: Jherek Healy Abstract This article provides a list of counterexamples, where some of the popular fx option interpolations break down. Interpolation of FX option prices (or equivalently volatilities), is key to risk-manage not only vanilla FX option books, but also more exotic derivatives which are typically valued with local volatility or local stochastic volatilility models. Keywords: FX Options, Volatility Interpolation, Local Volatility, Stochastic Volatility, Risk Management, Foreign Exchange (FX) ...

How to choose my stochastic volatility parameters? A review ArXiv ID: 2512.19821 “View on arXiv” Authors: Fabien Le Floc’h Abstract Based on the existing literature, this article presents the different ways of choosing the parameters of stochastic volatility models in general, in the context of pricing financial derivative contracts. This includes the use of stochastic volatility inside stochastic local volatility models. Keywords: Stochastic Volatility, Local Volatility, Derivatives Pricing, Parameter Estimation, Volatility Modeling, Equity Derivatives ...

Multi-asset and generalised Local Volatility. An efficient implementation ArXiv ID: 2411.05425 “View on arXiv” Authors: Unknown Abstract This article presents a generic hybrid numerical method to price a wide range of options on one or several assets, as well as assets with stochastic drift or volatility. In particular for equity and interest rate hybrid with local volatility. Keywords: Hybrid Numerical Method, Option Pricing, Local Volatility, Stochastic Drift, Monte Carlo Simulation, Equity and Interest Rate Hybrids ...

Watanabe’s expansion: A Solution for the convexity conundrum ArXiv ID: 2404.01522 “View on arXiv” Authors: Unknown Abstract In this paper, we present a new method for pricing CMS derivatives. We use Mallaivin’s calculus to establish a model-free connection between the price of a CMS derivative and a quadratic payoff. Then, we apply Watanabe’s expansions to quadratic payoffs case under local and stochastic local volatility. Our approximations are generic. To evaluate their accuracy, we will compare the approximations numerically under the normal SABR model against the market standards: Hagan’s approximation, and a Monte Carlo simulation. ...