14 Pages Posted: 24 Oct 2009
Date Written: 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.
JEL Classification: G13
Suggested Citation: Suggested Citation
By David Bates