Abstract
“No LSV model, No problem”. How does that sound? Dear reader, leveraging on the P&L equation of Chap. 3, we show how you may still price exotic equity derivatives using the Local Volatility model. This is achieved by adding an adjustment to the price of the derivative in order to account for complex features embedded in the payoff. We focus essentially on the vanna cost, and study the Autocall in its prototypical form, with annual recalls and a European Down-and-In put option at maturity.
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References
Bergomi L (2015) Stochastic volatility modeling. Wiley
Guennoun H (2019) Understanding autocalls: real time vega map. SSRN
Salon G (2019) Equity autocalls and vanna negative carries: pricing and hedging with a simple add-on. SSRN
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Kettani, O., Reghai, A. (2020). Market Model P&L Explain. In: Financial Models in Production. SpringerBriefs in Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-57496-3_4
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DOI: https://doi.org/10.1007/978-3-030-57496-3_4
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