Smile dynamics II
In an article published in Risk in September 2004, Lorenzo Bergomi highlighted how traditionalstochastic volatility and jump/Lévy models impose structural constraints on the relationshipbetween the forward skew, the spot/volatility correlation and the term structure of the volatilityof volatility. Here, he proposes a model that enables them to be controlled separately and alsoprices options on realised variance consistently. He presents pricing examples for a reversecliquet, a Napoleon, an accumulator and an option on variance
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