Geodesic
Forward implied volatility expansion in time-dependent local volatility models
Romain Bompis1 ; Julien Hok2
1CMAP, Ecole Polytechnique, Route de Saclay, 91128 Palaiseau cedex, France.
2Markit, Ropemaker Place 25 Ropemaker Street London EC2YLY, UK.
ESAIM. Proceedings, Tome 45 (2014), pp. 88-97
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We introduce an analytical approximation to efficiently price forward start options on equity in time-dependent local volatility models as the forward start date, the maturity or the volatility coefficient are small. We use a conditional expectation argument to represent the price as an expectation of a Black-Scholes formula computed with a stochastic implied volatility depending on the value of the equity at the forward date. Then we perform a volatility expansion to derive an analytical approximation of the forward implied volatility with a precise error estimate. We also illustrate the accuracy of the formula with some numerical experiments. Some results and tools of this work were presented at the conference SMAI 2013 in the mini-symposium ”Méthodes asymptotiques en finance”.
DOI : 10.1051/proc/201445009

Romain Bompis  1   ; Julien Hok  2

1 CMAP, Ecole Polytechnique, Route de Saclay, 91128 Palaiseau cedex, France.
2 Markit, Ropemaker Place 25 Ropemaker Street London EC2YLY, UK. 
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     author = {Romain Bompis and Julien Hok},
     title = {Forward implied volatility expansion in time-dependent local volatility models},
     journal = {ESAIM. Proceedings},
     pages = {88--97},
     year = {2014},
     volume = {45},
     doi = {10.1051/proc/201445009},
     language = {en},
     url = {http://geodesic.mathdoc.fr/articles/10.1051/proc/201445009/}
}
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Romain Bompis; Julien Hok. Forward implied volatility expansion in time-dependent local volatility models. ESAIM. Proceedings, Tome 45 (2014), pp. 88-97. doi: 10.1051/proc/201445009

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