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Hello everybody.
Generally, this class is ok, so you could use it for instance in FD engines or trees. But you should keep in mind next hints:
- your dt must be the same as time step in lattice method, otherwise the result will be unreliable, cause of difference in accuracy (check it among plain vanilas)
- the better choise is to use Bicubic interpolation of implied vol surface
- if your interpolation method is smooth the dy sensitivity won't be generally high, but i guess it's better to use lattice spot step for dy.
Nevertheless, there are still some problems:
1) The first one is speed. The derivative calculation is performed by FD valuation, which is too slowly.
Despite FD i plan to use first and second derivative of bicubic interpolation.
2) The second is tails. It's necessary to use extrapolation to constant values, which still save variance
increasing. Have anybody worked with this problem and could give some advices?
Regards.
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