December 2015
Intermediate to advanced
522 pages
20h
English
Content preview from Stochastic Volatility Modeling
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90 Stochastic volatility modeling
A.2 Marking to market
The UVM was originally designed for underlyings for which no volatility market
exists. Is it suited to underlyings for which implied volatilities exist?
A.2.1 An unhedged position
Consider the case of a large trade in a call spread. While the liquidity of vanilla
options is not sucient for us to hedge ourselves in the market, it may be sucient
enough that we decide
29
to mark our position to market.
With respect to the previous situation, the benets of the wider break-even
levels are wiped out because of the mark-to-market constraint:
σ
min
, σ
max
have to
be moved throughout time so that the UVM price ...
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