EQfront-officeconcept
Volatility Surface
Implied volatility across strike and maturity.
01Intuition
Name the object before manipulating it.
Stack smiles through time and you obtain the market's option-price coordinate system.
ONE-LINE DEFINITION
Implied volatility across strike and maturity.
02Mathematics
State the governing relationship.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
03Assumptions
Draw the boundary of the claim.
01
Definitions, units and information sets are fixed before the mathematical relationship is applied.
02
Rates and volatilities use decimal units and time uses year fractions unless stated otherwise.
03
The relationship is local to its stated assumptions and should not be extrapolated mechanically.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
04Market use
Connect the definition to an observable.
Interpolation, marking, scenario risk and exotic calibration inputs.
Intuition→Mathematics→Implementation→Desk risk
05Desk view
FRONT OFFICE VIEW
Translate the concept into a risk question.
State the convention, identify the observable and ask which EQ risk remains after the proposed hedge.
Ask Bateman about this topic →06Related