Singular exotic perturbation

A solution based on local volatility and sensitivities is proposed to calculate exotics' prices

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Florian Monciaud and Adil Reghai combine singular perturbation techniques with a price-adjustment argument to analyse the impact of the smile dynamics, ie, the price difference between local stochastic volatility and local volatility on exotic products. They obtain an elegant formula that is exact for vanilla options and they propose a set of well-chosen scenarios to compute the impact efficiently

The main driver when selecting a model for pricing and risk management

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