Local-stochastic volatility: models and non-models

Lorenzo Bergomi exposes a condition important to the use of LSV models in trading

CLICK HERE TO VIEW THE PDF

Lorenzo Bergomi examines local-stochastic volatility models and derives a simple condition such models must obey so the carry profit and loss of a delta-hedged/vega-hedged position makes sense in a trading context. This article gives examples of admissible and non-admissible models and discusses the issue of the delta position in the hedge portfolio. It ends with a characterisation of the breakeven levels of the local volatility model, which is itself in the admissibl

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: