Risk 1 - Hans Buehler
Risk 1 - Hans Buehler
Risk 1 - Hans Buehler
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Modeling <strong>Risk</strong> – Local Volatility<br />
Dupire’s Local Volatility<br />
• Plus<br />
— Allows to consistently price all combinations of European options.<br />
— One-factor model fast to simulate<br />
— Break Even Vol formula applies<br />
• Cons<br />
— Dynamical behaviour is not consistent<br />
— Implied Vol needs to be sensible<br />
Widely used reference model for equity derivatives.<br />
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