It is a valuable collection of key ideas concerning the FX smile surface and hedging of first generation exotics. I am very please Antonio took time to share his intuitive insights. Strongly recommended. Attention is given to a wide range of topics, ranging a wide spectrum between theory and practice, from market quoting conventions to volatility surfaces, change of measure techniques, dynamic arbitrage-free models, hedging and risk analysis. Among the several techniques presented to deal with volatility smile consistent pricing, I am glad room has been given to the mixture dynamics, one of the few tractable approaches where the Markovian projection is explicit and realized in the mixture diffusion and the uncertain volatility models, with striking results in the correlation between volatility and underlying in the projected diffusion version.
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The Volatility Surface 4. This is a fundamental building block of market-making activity and risk management, so we devote an in-depth analysis to the building of a consistent volatility surface. Volatility surface. The volatility surface, or matrix we will use the two terms without any distinction , is the map of the implied volatilities quoted by the market for plain vanilla options struck at different levels and expiring at different dates.
The volatility smile refers to a single expiry, whereas the volatility surface refers to a set of maturities. In practice, the matrix is built according to three main conventions, each prevailing as a standard in the market according to the traded underlying: the sticky strike, the sticky Delta, and finally the sticky absolute.
These are simple rules used to conveniently quote and trade options written on different assets and, as such, are not intended to model the evolution of the volatility surface. Definition 4. Sticky strike rule. When the sticky strike rule is effective, implied volatilities are mapped, for each expiry, with respect to the strike prices; this is the rule usually adopted in official markets e.
FX OPTIONS AND SMILE RISK CASTAGNA PDF
Tujind With in a span of five years we started the production of quality Load cells for process industries. Try the Kindle edition and experience these great reading features: This e-book is a distinct advisor to working an FX innovations ebook from the marketplace maker point of view. Withoutabox Submit to Film Festivals. We can derive the PDE whose solution, provided suitable terminal and boundary conditions are met, is the price of the contingent claim in a pdf volatility world. FX Options and Smile Risk: Economics Books If you have a financial request, please send your request via postal mail to: The booklet additionally introduces types that may options applied to cost and deal with FX thoughts castagna than interpreting the results of volatility at the gains pdf losses coming up from the hedging activity. If you do not receive an answer within 24 hours, please contact us again using these alternative email addresses:.
FX Options and Smile Risk by Antonio Castagna
Start your free trial Book Description The FX options market represents one of the most liquid and strongly competitive markets in the world, and features many technical subtleties that can seriously harm the uninformed and unaware trader. This book is a unique guide to running an FX options book from the market maker perspective. Striking a balance between mathematical rigour and market practice and written by experienced practitioner Antonio Castagna, the book shows readers how to correctly build an entire volatility surface from the market prices of the main structures. Starting with the basic conventions related to the main FX deals and the basic traded structures of FX options, the book gradually introduces the main tools to cope with the FX volatility risk. It then goes on to review the main concepts of option pricing theory and their application within a Black-Scholes economy and a stochastic volatility environment. The book also introduces models that can be implemented to price and manage FX options before examining the effects of volatility on the profits and losses arising from the hedging activity.
FX Options and Smile Risk