Smile Arbitrage
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Smile Arbitrage
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Author : Alaa El Din Hammam
language : en
Publisher:
Release Date : 2009
Smile Arbitrage written by Alaa El Din Hammam and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
The thesis studies the implied volatility, how it is recognized, modeled, and the ways used by practitioners in order to benefit from an arbitrage opportunity when compared to the realized volatility. Prediction power of implied volatility is examined and findings of previous studies are supported, that it has the best prediction power of all existing volatility models. When regressed on implied volatility, realized volatility shows a high beta of 0.88, which contradicts previous studies that found lower betas. Moment swaps are discussed and the ways to use them in the context of volatility trading, the payoff of variance swaps shows a significant negative variance premium which supports previous findings. An algorithm to find a fair value of a structured product aiming to profit from skew arbitrage is presented and the trade is found to be profitable in some circumstances. Different suggestions to implement moment swaps in the context of portfolio optimization are discussed.
Arbitrage Free Prediction Of The Implied Volatility Smile
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Author : Petros Dellaportas
language : en
Publisher:
Release Date : 2014
Arbitrage Free Prediction Of The Implied Volatility Smile written by Petros Dellaportas and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
This paper gives an arbitrage-free prediction for future prices of an arbitrary co-terminal set of options with a given maturity, based on the observed time series of these option prices. The statistical analysis of such a multi-dimensional time series of option prices corresponding to n strikes (with n large, e.g. n ≥ 40) and the same maturity, is a difficult task due to the fact that option prices at any moment in time satisfy non-linear and non-explicit no-arbitrage restrictions. Hence any n-dimensional time series model also has to satisfy these implicit restrictions at each time step, a condition that is impossible to meet since the model innovations can take arbitrary values. We solve this problem for any n ∈ N in the context of Foreign Exchange (FX) by first encoding the option prices at each time step in terms of the parameters of the corresponding risk-neutral measure and then performing the time series analysis in the parameter space. The option price predictions are obtained from the predicted risk neutral measure by effectively integrating it against the corresponding option payoffs. The non-linear transformation between option prices and the risk-neutral parameters applied here is not arbitrary: it is the standard mapping used by market makers in the FX option markets (the SABR parameterisation) and is given explicitly in closed form. Our method is not restricted to the FX asset class nor does it depend on the type of parameterisation used. Statistical analysis of FX market data illustrates that our arbitrage-free predictions outperform the naive random walk forecasts, suggesting a potential for building management strategies for portfolios of derivative products, akin to the ones widely used in the underlying equity and futures markets.
Inside Volatility Arbitrage
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Author : Alireza Javaheri
language : en
Publisher: John Wiley & Sons
Release Date : 2011-08-24
Inside Volatility Arbitrage written by Alireza Javaheri and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011-08-24 with Business & Economics categories.
Today?s traders want to know when volatility is a sign that the sky is falling (and they should stay out of the market), and when it is a sign of a possible trading opportunity. Inside Volatility Arbitrage can help them do this. Author and financial expert Alireza Javaheri uses the classic approach to evaluating volatility -- time series and financial econometrics -- in a way that he believes is superior to methods presently used by market participants. He also suggests that there may be "skewness" trading opportunities that can be used to trade the markets more profitably. Filled with in-depth insight and expert advice, Inside Volatility Arbitrage will help traders discover when "skewness" may present valuable trading opportunities as well as why it can be so profitable.
The Volatility Smile
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Author : Emanuel Derman
language : en
Publisher: John Wiley & Sons
Release Date : 2016-09-06
The Volatility Smile written by Emanuel Derman and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016-09-06 with Business & Economics categories.
The Volatility Smile The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models The first half of the book, Chapters 1 through 13, can serve as a standalone textbook for a course on option valuation and the Black-Scholes-Merton model, presenting the principles of financial modeling, several derivations of the model, and a detailed discussion of how it is used in practice. The second half focuses on the behavior of the volatility smile, and, in conjunction with the first half, can be used for as the basis for a more advanced course.
Smile Pricing Explained
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Author : P. Austing
language : en
Publisher: Springer
Release Date : 2014-08-29
Smile Pricing Explained written by P. Austing and has been published by Springer this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014-08-29 with Business & Economics categories.
Smile Pricing Explained provides a clear and thorough explanation of the concepts of smile modelling that are at the forefront of modern derivatives pricing. The key models used in practice are covered, together with numerical techniques and calibration.
A Market Model For Stochastic Smiles
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Author : Alex Zilber
language : en
Publisher:
Release Date : 2007
A Market Model For Stochastic Smiles written by Alex Zilber and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with categories.
We introduce a new approach that allows to construct no-arbitrage market models of implied volatility surfaces. The need for developing such models has long been recognized. The framework presented here makes it possible to generate models of a joint evolution of an arbitrary number of option price processes together with the underlying price process. The key idea of the approach is to take a deterministic smile model as a backbone around which a stochastic smile model can be constructed without violating no-arbitrage constraints.
Volatility Smile Consistent Option Models
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Author : George S. Skiadopoulos
language : en
Publisher:
Release Date : 2003
Volatility Smile Consistent Option Models written by George S. Skiadopoulos and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003 with categories.
The developing literature on quot;smile-consistentquot; no-arbitrage models has emerged from the need to price and hedge exotic options consistently with the prices of standard European options. This survey paper describes the steps through which this literature has evolved by providing a taxonomy of the various models. It highlights the main ideas behind the different models, and it outlines their advantages and limitations. Practical issues in implementing the models are also discussed.
No Arbitrage Bounds For The Forward Smile Given Marginals
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Author : Sergey Badikov
language : en
Publisher:
Release Date : 2016
No Arbitrage Bounds For The Forward Smile Given Marginals written by Sergey Badikov and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
We explore the robust replication of forward-start straddles given quoted (Call and Put options) market data. One approach to this problem classically follows semi-infinite linear programming arguments, and we propose a discretisation scheme to reduce its dimensionality and hence its complexity. Alternatively, one can consider the dual problem, consisting in finding optimal martingale measures under which the upper and the lower bounds are attained. Semi-analytical solutions to this dual problem were proposed by Hobson and Klimmek (2013) and by Hobson and Neuberger (2008). We recast this dual approach as a finite dimensional linear programme, and reconcile numerically, in the Black-Scholes and in the Heston model, the two approaches.
De Arbitraging With A Weak Smile
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Author : Babak Mahdavi-Damghani
language : en
Publisher:
Release Date : 2014
De Arbitraging With A Weak Smile written by Babak Mahdavi-Damghani and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
The aim of this article is to address the methodology behind de-arbitraging a realistic volatility surface and stressing it without adding arbitrages. We derive from basic principles the constraints which the changes on the strike and the tenor axis must satisfy in order to make a volatility surface arbitrage-free. The two most influential parameterized versions of the volatility surface will then be discussed, along with their origin and their limitations. Furthermore, this review will address the issues of finding the closest arbitrage-free volatility surface through the gSVI method, a more realistic parameterized version of the volatility surface applicable to the FX, commodities, and equities markets. Finally, using examples, the methodology behind coherently stressing this arbitrage-free volatility surface will be looked at, in order to capture and isolate the risk associated with higher-order Greeks like the Vanna or the Vomma.
Repricing The Cross Smile
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Author : Peter Austing
language : en
Publisher:
Release Date : 2020
Repricing The Cross Smile written by Peter Austing and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2020 with categories.
Derivative contracts on multiple foreign exchange rates must be priced to avoid arbitrage by contracts on the cross-rates. Given the triangle of smiles for two underlyings and their cross, we provide an analytic formula for a joint probability density such that all three vanilla markets are repriced. The method extends to N dimensions and leads to simple necessary conditions for a triangle of smiles to be arbitrage-free in the model.