Chia-Wei Lai on LinkedIn: Pricing VIX options using the Heston model (2024)

The SABR model (Stochastic Alpha, Beta, Rho) is a widely used model in financial engineering for modeling forward interest rates and volatility. It was developed by Patrick Hagan, Deep Kumar, Andrew Lesniewski, and Diana Woodward in their 2002 paper, "Managing Smile Risk." The model is particularly popular for its ability to handle different market conditions and effectively model the volatility smile in derivatives markets.Components of the SABR ModelThe SABR model includes four key parameters, each symbolized by a Greek letter:1. α (Alpha): Represents the initial volatility of the forward rate.2. β (Beta): Controls the elasticity of the volatility; essentially it determines the nature of the stochastic process underpinning the asset price. A beta of 1 corresponds to a geometric Brownian motion, while lower values allow for more general processes.3. ρ (Rho): The correlation between the forward rate and its volatility. This is crucial as it dictates how much the two factors can influence each other.4. ν (Nu): The volatility of volatility, or how erratic the changes in volatility are.

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Looking for a good parametric model for the volatility surface? What about the Stochastic Volatility Inspired (SVI) Model?With its five parameters, the SVI model allows to fit a large number of possible volatility curves, with specific non-arbitrage conditions.The SVI Jump-Wings (SVI-JW) parameterisation is an interesting alternative method where the different parameters have a concrete interpretation, each of them controlling a specific aspect of the smile, making model calibration easier and more robust.TheSurface SVI (SSVI) parameterisation is an extension of the SVI model for the whole volatility surface, free of arbitrage under certain conditions.More about it: https://lnkd.in/eauS27Y7Quant Nexthttps://quant-next.com/

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In this paper, Georgios Skoufis, cross asset quantitative analyst at Bloomberg, proposes a closed-form convexity adjustment for the SABR model applied to the pricing of risk-free rate derivatives https://lnkd.in/dYbQDwCr

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Are you a badass at making profit on financial markets ?When you trade equities futures, you need to understand what you are doing.Volatility, gross and net exposure, do these basic concepts ring a bell ?I trade equities futures pairs on a regular basis.Here is a short video that explain the impact of your exposure and your performance on your P&L, in less than 8 minutes.https://lnkd.in/eirntF5B

Cutting Edge: A model-independent valuation adjustment for interest rate swaps. https://hubs.li/Q02ktgyH0 Non-subscribers can get a snapshot of Risk’s coverage. Registration is free and allows you to read two articles a month: https://hubs.li/Q02ktk6f0

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Cutting Edge: A model-independent valuation adjustment for interest rate swaps. https://hubs.li/Q02ktj8s0 Non-subscribers can get a snapshot of Risk’s coverage. Registration is free and allows you to read two articles a month: https://hubs.li/Q02ktn3k0

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