Janek, Agnieszka (2011): The vanna  volga method for derivatives pricing.

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Abstract
This Master thesis highlights some basic features and applications of the vannavolga method and its accuracy when pricing plain vanillas and simple barrier options.
In the paper we derive formulas for premiums of vanilla FX options using two versions of the vannavolga method – the exact vannavolga method and the simplified vannavolga method. We review a very common vannavolga variation used to price the firstgeneration exotics and the application of the vannavolga method to construct the implied volatility surface.
Furthermore, we briefly discuss a popular stochastic volatility model that aims to take the smile effect into account – the Heston model. Its accuracy and efficiency is further compared with that of the vannavolga method.
In the part of the thesis, which is devoted to calibration results, we compare the results obtained by the exact vannavolga method, the simplified vannavolga method and the Heston model. We also investigate the accuracy of the vannavolga method applied to barrier options.
All the plots and graphs in this thesis were produced by programs implemented by the author in MATLAB. These programs are available on request.
Item Type:  MPRA Paper 

Original Title:  The vanna  volga method for derivatives pricing. 
Language:  English 
Keywords:  vanna volga method; implied volatility; volatility smile; Heston model 
Subjects:  C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63  Computational Techniques ; Simulation Modeling C  Mathematical and Quantitative Methods > C0  General > C02  Mathematical Methods 
Item ID:  36127 
Depositing User:  Agnieszka Janek 
Date Deposited:  22. Jan 2012 23:00 
Last Modified:  11. Mar 2014 15:56 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/36127 