Re: Vanilla American Option Pricing

Posted by Luigi Ballabio on May 10, 2017; 3:14pm
URL: http://quantlib.414.s1.nabble.com/Vanilla-American-Option-Pricing-tp14486p18261.html

The binomial engine extracts from the surface the volatility corresponding to the maturity and strike of the option, and then uses it across the tree as constant vol.

Luigi

On Fri, Apr 28, 2017 at 11:41 PM Jack Pai <[hidden email]> wrote:

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




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