Forums  > Basics  > Forward Volatility and Stochastic Vol vs Local Vol  
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Total Posts: 265
Joined: Mar 2018
Posted: 2019-08-10 18:35
Could someone please explain (in simple terms) why local vol cannot deal with forward volatility correctly and stochastic vol can?

I cannot understand the arguments on stack exchange regarding this connecting to the sabr model and exotic options. Why do you need a good forward volatility model so that you can calculate vega well for exotics?


Total Posts: 794
Joined: Jun 2005
Posted: 2019-08-10 21:33
Very simple = no formulas:

Forward vol is stochastic variable and is a risk factor.

Within "local vol" volatility is static (lucky parameterization) and is not a risk factor.

PS. Do you arbitrage between stack exchange and NP? Where is the link?
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