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Volatility Interpolation

Jesper Andreasen

Danske Bank - Danske Markets

Brian Norsk Huge

Danske Bank

March 20, 2010

We present an effcient algorithm for interpolation and extrapolation of a discrete set of European option prices into a an arbitrage consistent full double continuum in expiry and strike of option prices. The method is based on an application of the fully implicit finite difference method and related to the local variance gamma model of Carr (2008). In a numerical example we show how the model can fitted to all quoted prices in the SX5E option market (12 expiries, each with roughtly 10 strikes) in 0.05 seconds of CPU time.

Number of Pages in PDF File: 11

Keywords: Option pricing, implicit finite difference

JEL Classification: G12, G13

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Date posted: October 21, 2010 ; Last revised: October 30, 2010

Suggested Citation

Andreasen, Jesper and Huge, Brian Norsk, Volatility Interpolation (March 20, 2010). Available at SSRN: https://ssrn.com/abstract=1694972 or http://dx.doi.org/10.2139/ssrn.1694972

Contact Information

Jesper Andreasen (Contact Author)
Danske Bank - Danske Markets ( email )
Holmens Kanal 2-12
DK-1092 Copenhagen K
Brian Norsk Huge
Danske Bank ( email )
DK-1092 Copenhagen K
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