Re: Vanilla American Option Pricing

Posted by Jack Pai on Apr 28, 2017; 9:40pm
URL: http://quantlib.414.s1.nabble.com/Vanilla-American-Option-Pricing-tp14486p18233.html

Hi,

Follow up questions regarding what volatility is used in VanillaOption Engine or BlackScholesProcess.

The EquityOption sample code uses constant vol, which is implied vol. The BlackVarianceSurface will store an implied vol surface. If I pass the BlackVarianceSurface to the constructor of BlackScholesProcess, and then, use the Process in a VanillaEngine, e.g. BinomialVanillaEngine<Tian>, how does the BinomialVanillaEngine use the Vol Surface? Does it pick 1 implied vol from the surface and use it across the binomial tree as constant vol? Or does it calculate a local vol surface based on the implied vol surface passed in and then use the local vol in the binomial tree?

Thanks