Titlebook: Smile Pricing Explained; Peter Austing Book 2014 Palgrave Macmillan, a division of Macmillan Publishers Limited 2014 Volatility smile.Impl

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Local Stochastic Volatility, stochastic volatility approach, we have seen that there are many possible models, each having the ability to generate a smile. This is rather unsatisfactory since it leaves us wondering which approach or which particular model we should use. There are further questions we have touched on but not ye

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Afterword,subject. The quality that can make any quantitative subject thrilling is the pure power of mathematics leading to simple conclusions that otherwise seem impossible or counterintuitive. Famous examples come from physics: quantum theory and relativity lead to remarkable unexpected conclusions about th

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Dynamic Hedging and Replication,der could take on a new contract in a large notional amount and value it in a manner guaranteed to avoid arbitrage. All very well, but that does not help the bank manage the trade through its lifetime.

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Stochastic Volatility,atively, we could look at the one month volatility implied from at-the-money options over the last year. We would see that in both cases the volatility increases in times of political turmoil or uncertainty. As we cannot predict such events, it seems reasonable to model volatility itself as a stochastic process.

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