Local Volatility Under Stochastic Interest Rates Using Mixture Models
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Local Volatility Under Stochastic Interest Rates Using Mixture Models
Author | : Mark S. Joshi |
Publisher | : |
Total Pages | : 22 |
Release | : 2016 |
Genre | : |
ISBN | : |
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A key requirement of any equity hybrid derivatives pricing model is the ability to rapidly and accurately calibrate to vanilla option prices. To this end, we present two methods for calibrating a local volatility model under correlated stochastic interest rates. This is achieved by first fitting a mixture model to market prices, and then determining the local volatility function that is consistent with this mixture model.
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