Download This PaperOn the Forward Smile
15 Pages Posted: 31 Jul 2019 Last revised: 21 Apr 2020
Date Written: July 30, 2019
Abstract
Using short-time expansion techniques, we obtain analytic implied volatilities for European and forward starting options for a family of stochastic volatility models with arbitrary local volatility component and time dependent (piecewise constant) parameters. The formulas can be used to efficiently calibrate the model to European options at two expiries and to calculate the spanning forward starting option price.
Keywords: Forward Starting Options, Stochastic Volatility, SABR, Implied Volatility
JEL Classification: G13
Suggested Citation: Suggested Citation
Roos, Thomas, On the Forward Smile (July 30, 2019). Available at SSRN: https://ssrn.com/abstract=3429050 or http://dx.doi.org/10.2139/ssrn.3429050
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