BibTeX
@MISC{West04calibrationof,
author = {Graeme West},
title = {Calibration of the SABR Model in Illiquid Markets},
year = {2004}
}
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Abstract
ABSTRACT Recently the SABR model has been developed to manage the option smile which is observed in derivatives markets. Typically, calibration of such models is straightforward as there is adequate data available for robust extraction of the parameters required asinputs to the model. The paper considers calibration of the model in situations where input data is very sparse. Although this will require some creative decision making, the algorithms developed here are remarkably robust and can be used confidently for mark to market and hedging of option portfolios. KEY WORDS: SABR model, equity derivatives, volatility skew calibration, illiquid markets Why another Skew Model? Vanilla OTC European options or European futures options are priced and often hedged using respectively the Black–Scholes or Black model. In these models there is a one-to-one relation between the price of the option and the volatility parameter s, and option prices are often quoted by stating the implied volatility s imp, the unique value of the volatility which yields the option price when used in the formula. In the classical Black–Scholes–Merton world, volatility is a constant. But in reality, options
Keyphrases
sabr model illiquid market option price option smile input data equity derivative option portfolio vanilla otc european option unique value robust extraction adequate data volatility parameter european future option creative decision making classical black scholes merton world black model skew model one-to-one relation key word implied volatility imp derivative market abstract recently volatility skew calibration black scholes
