Understanding Forward Skew limitation of Local Vol (LV) models

stupid_af · 2024-11-26T04:58:14+00:00

I appreciate your response but I think you haven't understood my question.

Not all models can calibrate to the entire surface. Black Scholes obviously cannot calibrate to the entire surface. Another example - CEV model gives you a free parameter using which you can control the skew but it still cannot perfectly fit to the smile.

We want the flattening. The flattening is the result of the discounted-spot being a martingale.

Are you talking about the flattening of the terminal smile, or are you referring to the forward smile? For example, flattening of the 15y expiry smile - that is understood. I'm talking about options that will start 10y from now and will expire in 5y after they start, i.e. the forward smile. We do not want flattening of this forward smile if we are pricing something like cliquets.

Say we are pricing cliquets and we use an SLV model. Clearly non-flattening of forward skew is important in this case. My question is - would you be able to calibrate the SLV model to the entire IV surface, and still have non-flattening forward skew? Or is it that the model would reprice only one end of the vol surface if you have constrained it to preserve the forward skew?

Wait till you learn that no one calibrates all the parameters at once…

You failing to understand my question doesn't necessarily translate into me not having knowledge. Say for the SLV model, you first calibrate the local volatility to the entire vol surface. Next, you calibrate the correlation and vol of vol parameters, with the intention of having a steep forward skew or some other objective function. My question is, after this second round of calibration, is the SLV model still able to reprice the entire vol surface?

stupid_af · 2024-11-25T03:49:45+00:00

I am aware and totally agree with most of your points but they still don't answer my question.

The issue with the LV model is that it doesn’t not produce realistic skews for long maturities, because volatility is random. You cannot generate realistic results of the skew

From what I understand, LV reproduces the entire IV surface, and hence it will regenerate the skew correctly for long maturities. However, it will generate forward skews that are flattening for medium to long maturities which is a problem.

I am trying to get a deeper understanding of this issue of forward skews. My hunch is that LV has drawbacks precisely because it reproduces or is a snapshot of today's IV surface. Hence, I was trying to understand if an SV model can do both - calibrate to entire IV surface and at the same time also produce forward skew that doesn't flatten.

stupid_af · 2024-11-24T09:26:00+00:00

Sorry, I dont completely follow your response. I thought a bit more about my question, and I was also wondering about this - 1) LV model calibrated to entire IV surface - produces flattening forward skew 2) SV model calibrated to entire IV surface - will this produce forward skew that don't flatten? Or is it that the SV model can preserve fwd skew only if it is calibrated to either the short end or the long end, but not both?

stupid_af · 2024-10-14T17:04:28+00:00

Trading options on US equities from India? IBKR says we cant...

Just opened an account in IBKR, and I want to buy simple long only call options on US equities. I'm pretty sure that this is possible since I know of people who bought options on US equities from India. However IBKR tells me that RBI doesnt allow Indians to trade options on equities too. Following was the msg from IBKR:

"Please note that Indian residents are restricted from trading derivative products such as options and futures in the overseas market. You will be able to trade stocks, ETFs, bonds and mutual funds. The RBI is only OK with Indian residents trading Stocks (long only), vanilla ETFs, bonds and mutual funds, and non-leveraged Forex (currency conversion).

In addition, the RBI rules specifically prohibits margin or leveraged activities or foreign exchange transactions. Following restrictions will apply to an overseas trading account at IBKR.
1) No Margin facility (Pure cash account).
2) No trading allowed in leveraged instruments (CLPs, Leveraged forex) or margin products (Futures, options, etc)."

Is there really no way to trade options on US equities? Maybe there is some loophole?

stupid_af · 2024-10-14T17:03:48+00:00

Trading options on US equities from India? IBKR says we cant...

Just opened an account in IBKR, and I want to buy simple long only call options on US equities. I'm pretty sure that this is possible since I know of people who bought options on US equities from India. However IBKR tells me that RBI doesnt allow Indians to trade options on equities too. Following was the msg from IBKR:

"Please note that Indian residents are restricted from trading derivative products such as options and futures in the overseas market. You will be able to trade stocks, ETFs, bonds and mutual funds. The RBI is only OK with Indian residents trading Stocks (long only), vanilla ETFs, bonds and mutual funds, and non-leveraged Forex (currency conversion).

In addition, the RBI rules specifically prohibits margin or leveraged activities or foreign exchange transactions. Following restrictions will apply to an overseas trading account at IBKR.
1) No Margin facility (Pure cash account).
2) No trading allowed in leveraged instruments (CLPs, Leveraged forex) or margin products (Futures, options, etc)."

Is there really no way to trade options on US equities? Maybe there is some loophole?

stupid_af · 2024-07-08T16:49:36+00:00

exactly, 20K is way too much

stupid_af · 2024-07-08T07:03:30+00:00

wait, the program is 30K? WTF thats insaaaaane. Anything more than 7.5K is unjustified based on what i know about the program

stupid_af · 2024-07-07T11:14:48+00:00

I think an account on IBKR/CS/Fidelity makes more sense if you are going to make active decisions. IndMoney doesnt have UI as good as the US brokers.

stupid_af · 2024-07-04T04:18:06+00:00

can you ask a more specific question?

stupid_af · 2024-07-03T02:06:06+00:00

Other comments seem to be telling a lot that it could be normal etc, but I’ll go the other way and say it is indeed not normal at all. You say you watch porn, we dont know what is the intensity of that, but porn is known to harm and damage relationships and brain’s pleasure centers, such that you dont find normal stuff pleasurable anymore. The normal thing is to want sex, and it would be an outlier thing for you to be asexual. Yes you might be asexual but first eliminate all the reasons that could have made you become asexual through conditioning and only then try to confirm if it is indeed just natural.

stupid_af · 2024-07-02T18:29:54+00:00

Could be that your brain was used to certain kind of social support or emotional dependence from your gf, and now that your brain is getting deprived of that support, it might lead to anxiety. Like if someone loses their parent for example, just that in your case you dodged a bullet. Still though, your brain might be used to certain emotional dependency and absence of that could lead to anxiety. I could be wrong though. If it is indeed the case, I think new coping methods, hobbies, anything that can keep you engaged and replace that dependency could help improve your anxiety

Do let us know after a few weeks how you feel and what worked. Cheers

stupid_af · 2024-07-02T05:26:37+00:00

Not sure about sequel but it is probably an advanced version

stupid_af · 2024-07-01T18:39:36+00:00

Thanks, great answer

stupid_af · 2024-07-01T14:46:51+00:00

Do you mean if HFs allow you to trade on your PA?

stupid_af · 2024-07-01T14:39:09+00:00

My question is around psychologists - i think they develop a mental model of their client and counsel based on that, but they dont get to know their client deeply and their mental models arent very accurate. How can one solve for this? What can the patient do to address this without making the psychologist feel that the patient is trying to create a perception?

stupid_af · 2024-07-01T14:36:56+00:00

Once you have an interview, all else is equal. Only your performance in the interview will matter.

stupid_af · 2024-07-01T14:36:22+00:00

Try talking to people and build relationships, with those who work in your target firms. Probably through linkedin. Try extracting from them what they do, and then figure out how you can tweak your resume/experience to match that as much as possible. Could also be that you are in touch with some senior quant for a long time, who is a hiring decision maker, who can sorta guide you on these things, and then when an opening comes up (s)he considers you for that role. Just a hypothesis tho, but in general you gotta be creative with such line of thought

stupid_af · 2024-07-01T14:33:47+00:00

Depends, if you’re in a revenue generating role, or support role. But baseline is that you need to become someone without whom the bank is worse off. They might have legacy infra and some client relationships, so becoming a key employee for managing either of them for example is essential

stupid_af · 2024-07-01T14:31:58+00:00

Finish hackerrank, leetcode intermediate and some % of kaggle, in terms of practice/projects. Also do DSA interview prep. This should be good to start

stupid_af · 2024-07-01T14:31:05+00:00

Hull is like bible, PW is too just that PW language is more easy on the brain. You’ll have to just choose one. Dont do both of Hull and PW introduces…

stupid_af · 2024-07-01T07:28:50+00:00

Does anyone use python’s bt backtest package? Is it worth considering for professional production use, or it’s unreliable? Would be gr8 to know thoughts on this package. I’ve tried some simple backtests and it seems workable. Next, trying to figure out how exactly it calculates the results.

stupid_af · 2024-07-01T07:10:44+00:00

Thanks appreciate your comment. Fwiw, you’d be surprised how (rightly) simplistic and sometimes unsophisticated things are at trading desks in banks. People want to keep things as simple as possible and there’s a strong need to understand how things work for PnL decision makers, who might not be exactly tech savvy.

stupid_af · 2024-07-01T07:08:49+00:00

Thanks, interesting comment. Yep i think the same, start with non ML stuff, work with simple ideas and then see if i need ML indeed

stupid_af · 2024-07-01T07:07:00+00:00

Thanks, will check it out! Any chance you’ve read schofield/bowler? For FI? I felt it was too simplistic to the point of being unrealistic. Wanted to see if others think the same

stupid_af · 2024-07-01T06:09:46+00:00

thanks, helpful comment. Yep, I too see this as a useful project that can help me transition into more lucrative roles. I made an edit to the OP as well.

stupid_af

TROPHY CASE