Smile transformation for price prediction

Prediction of arbitrage-free option prices that outperform existing models


Intuitively, a set of implied volatilities IVt(Ki, T), i = 1, . . . , n, allows arbitrage if and only if it is possible to trade (buy and sell) the corresponding contracts, at prices given by IVt(Ki, T), i = 1, . . . , n, and follow a self-financing trading strategy on the foreignexchange spot rate (buy and sell the underlying currencies) in such a way that at some future time the portfolio of options and the gains from the trading strategy in aggregate have a non-neg

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