Smile Dynamics II
March 1, 2005
In a previous article we highlighted how traditional stochastic volatility and Jump/Lévy models impose structural constraints on how the short forward skew, the spot/vol correlation, and the term structure of the vol-of-vol are related. Here we propose a model that enables them to be controlled separately and also prices options on realized variance consistently. We present pricing examples for a reverse cliquet, a Napoleon, an accumulator and an option on variance.
Number of Pages in PDF File: 14
JEL Classification: G13working papers series
Date posted: October 24, 2009
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