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Smile Dynamics II

14 Pages Posted: 24 Oct 2009  

Lorenzo Bergomi

Societe Generale

Date Written: March 1, 2005

Abstract

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

Bergomi, Lorenzo, Smile Dynamics II (March 1, 2005). Available at SSRN: https://ssrn.com/abstract=1493302 or http://dx.doi.org/10.2139/ssrn.1493302

Lorenzo Bergomi (Contact Author)

Societe Generale ( email )

Paris-La Défense, Paris 92987
France

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