Volatility interpolation
Developing an arbitrage-free, consistent volatility surface in both expiry and strike from a discrete set of option quotes is a difficult and computationally intense problem. In this article, Jesper Andreasen and Brian Huge use a non-standard variant of the fully implicit finite difference method to reduce the computational cost by orders of magnitude. An example shows how the model can fit the Eurostoxx 50 option market in approximately 0.05 seconds of CPU time
Local volatility models such as those of Dupire (1994), Andersen & Andreasen (1999), JP Morgan (1999) and Andreasen & Huge (2010) ideally require a full continuum in expiry and strike of arbitrage-consistent European-style option prices as input. In practice, of course, we only observe a discrete set of option prices.
Volatility interpolation
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Markets
Tradeweb streamlines bilateral swap unwinds
After sterling IRS termination, platform eyes electronic credit checking and CSAs
Treasury buyback risks a (collateral) chain reaction
Rebalancing of bond tenors could stretch collateral links to breaking point, argues economist
Dollar reversal could scupper EM carry boom, dealers warn
Surprise rate hike or a USD rally may force unwinds in popular emerging markets carry trades
Ex-Citi banker’s ‘perfect marriage’ with Franklin’s crypto unit
Investment giant throws weight behind Chris Perkins’ plan for investing in digital markets
Issuers wrap prediction market bets for European clients
Structured notes from Marex and Otala offer prediction market exposure to European firms shut out of the raw contracts
CME offers basis traders a leg up
New Treasury Link service ‘levels playing field’ in strategy dominated by high-speed players
Alphabet, Micron ramp up FX hedging
Tech pair leads FX derivatives surge in year to Q2, while notionals at Apple and Johnson & Johnson decline
More dealers enter OTC market – but are there enough?
Dealer Rankings 2026: Data shows bigger list of sell-side names in many markets; also suggests largest buy-side firms may be short of options
