Letters from a Steel Town: Calibration problems – An inverse problems view: Wilmott Magazine Article – Heinz W. Engl

When pricing structured or derivative financial instruments, the typical steps a quant has to do are the following: 1. Choose a model for the movement of the underlying(s) 2. Identify (“calibrate”) the model parameters from market prices of liquid instruments 3. Calculate the fair value of the structured instrument by appropriate numerical techniques. We will concentrate on step 2 in this article.

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