We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
Calibrating Arbitrage Free Implied Volatility Surface with Embedded Put-Call Parity.
- Authors
Dutta, Tridibesh; Ghosh, Alankar
- Abstract
An input implied volatility surface to local volatility models, which does not conform to no-arbitrages may result in mispricing. compliance to calendar and strike no-arbitrage, equivalence of call and put in any delta-neutral portfolio is vital for fair valution when trading European options. In this article, as an extension to smoothing of implied volatility surface constrained by strike and calendar no-arbitrages, we present computation of an arbitrage free implied volatility by additionally incorporating Black Scholes' put-call parity. Here, we assume no transaction and borrow costs. This method is leveraged on quadratic optimization, smoothing two interdependent natural splines simultaneously using appropriate shape restrictions.
- Subjects
ARBITRAGE; FINANCIAL markets; FOREIGN exchange; PRICING; MARKET volatility; SPECULATION
- Publication
Decision (0304-0941), 2010, Vol 37, Issue 1, p57
- ISSN
0304-0941
- Publication type
Article