SciComp - Futures Volatility Surface Calibrator
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Stochastic Interest Rates for Local Volatility Hybrid Models: Wilmott Magazine Article
E. Benhamou, A. Gruz and A. Rivoira 216 Views

This paper studies the impact of stochastic interest rates for local volatility hybrids. We first show that we can explicitly determine the bias between the local volatility of a model with stochastic interest rates and the local volatility of the same model but with deterministic interest rates as a function between the correlation of the stochastic interest rates and the digital at the local strike.


Adjusters: Turning Good Prices into Great Prices: Wilmott Magazine Article
Patrick S.Hagan 3914 Views

I'm sure we've all been there: We need to price and trade an exotic derivative, but because of limitations in our pricing systems, we cannot calibrate on the 'natural set' of hedging instruments. Instead we have to calibrate on some other set of vanilla instruments, which provide only a poor representation of the exotic. Consequently, our prices are questionable, and if we are bold enough to trade on these prices, our hedges are unstable, chewing up any profit as bid-ask spread. Here we discuss how to get out of these jams by using 'adjusters', a technique for re-expressing the vega risks of an exotic derivative in terms of its 'natural hedging instruments.' This helps prevent unstable hedges and exotic deal mismanagement, and, as a side benefit, leads to significantly better pricing of the exotic.

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