20 Pages Posted: 30 Jul 2008 Last revised: 13 Jul 2009
Date Written: June 25, 2009
We give a general treatment of the Vanna-Volga mark-to-market volatility smile correction in application to pricing of contracts with European exercise on a single underlying. The method remains applicable in cases of delayed or misaligned expiries and absolute dividends. It is also applied to cases of time-dependent instantaneous volatility, multiple underlying assets and random interest rates. We also offer computation of the underlying volatility from market data and most valuable correction using more than three traded options.
Keywords: Fair value volatility, mark-to-market correction, Vanna-Volga, pivot options, arbitrary number of pivots, stochastic interest rate, multiple assets, time-dependent volatility, equity/commodity/FX options, vanilla or exotic contracts, European or American exercise
JEL Classification: C5, C6, G1
Suggested Citation: Suggested Citation