Re: Volatility Surface Interpolation

Posted by Ferdinando M. Ametrano-3 on Feb 06, 2008; 5:50pm
URL: http://quantlib.414.s1.nabble.com/Volatility-Surface-Interpolation-tp5741p5746.html

On Wed, Feb 6, 2008 at 6:16 PM, Luigi Ballabio <[hidden email]> wrote:
>  Question for the volatility experts: I know that a decreasing variance
>  makes no sense---if it's the actual variance of an underlying. Since
>  we're talking of smiled volatility here [...] should we still
>  require monotonicity along each strike?

we shouldn't in my opinion. I would remove the require condition.

mimicking the no-smile reasoning: if the ATM forward level was
constant between 2 dates then you should have increasing variance and
increasing option values in order to avoid arbitrage. But if the ATM
changes this is not true anymore.

ciao -- Nando

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