Miniworkshop: Practitioner's Day
Time: Mon, September 08, 2008, 14:00-14:45
Speaker: John Crosby
Abstract
It is very well appreciated that it would be desirable to be able to fit a model, for eg fx options, to the market prices of both vanilla options and barrier options (especially the prices of Double No Touch options). Indeed, recent talks at practitioner conferences have highlighted the desirability of doing this – unfortunately, it is harder said than done. We offer a solution which makes the desirable possible. We describe a class of Levy-type models which are designed to be calibrated to the market prices of both liquid barrier options (such as Double No Touch options) and vanilla options. The calibration problem is simplified by virtue of the fact that it is reduced to a two-stage problem and that both barrier options and vanilla options can be priced semi-analytically (up to Transform inversion). By virtue of the fact that the model allows for jump processes (with either finite or infinite activity) and stochastic volatility, the model can generate realistic smiles and realistic future dynamics of the spot.
Presentation slides (pdf, 325 KB)
URL: www.ricam.oeaw.ac.at/specsem/sef/events/program/presentation.php
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