Alternative Finance

This site is dedicated to alternative finance and strategies that are meant to outperform the S&P 500, provide uncorrelated returns, and review esoteric areas of finance.

Normally, I detest most blogs. Honestly, if I was someone else, I would probably detest this one. Blogs, which can be great, but they can also be self-indulgent and predictable. I have friends that blog and when I receive an email that they have a new posting, it often goes straight to a Junk folder, where I either read it later or promptly delete it and am infuriated by the idea that someone has written something that I (or anyone else) would find remotely interesting or would take the time to read. I don't expect any different treatment of mine so harsh criticism or general apathy will be allowed (if not expected). I do regularly read some blogs and will try to keep this informative and well-written.

Wednesday, January 19, 2011

Gatheral's Stochastic Volatility Inspired (SVI) approach to model vol skews

Recently, I took a financial modeling class with some fellow students at the University of Minnesota.  We worked on modeling the volatility surface of commodity and SPX options (which I used to trade many moons ago).  Jim Gatheral, in his book The Volatility Surface, uses the following parametric model for the skew:
 Gatheral then uses an objective function minimization process compared to the implied vol given by Black-Scholes:
The resulting skew/surface (3D in time) looks like this:
  This is extremely useful in pricing exotics, variance swaps, and trading illiquid vanilla options.

Many thanks to Chris Prouty, Cargill Risk Mngmt Trader (mentor and friend) and fellow classmates (A. Abraham, F. Yang, F. Wan, S. Chiu, S. Bhimireddy, and Y. Li). 
for more info see:
https://sites.google.com/site/fmmodeling11/?pli=1

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