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Info about adaptVanDelta argument in VannaVolgaBarrierEngine

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Info about adaptVanDelta argument in VannaVolgaBarrierEngine

Igor Swie

Hello,

I've seen that there is an additional correction to the Vanna Volga one when setting the adaptVanDelta to true in the VannaVolgaBarrierEngine.

I haven't found this correction in usual textbooks.

Who can explain this extra correction?

 

Thanks


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Re: Info about adaptVanDelta argument in VannaVolgaBarrierEngine

Peter Caspers-4
Hi Igor,

on behalf on my dear former colleague Yue Tian (who wrote the engine): I think the adaptVanDelta flag is inspired by the Vanna-Volga Model in Murex, which also provides such a flag. The idea is to replicate the “true" vanilla price computed on the original smile in the edge case that the barrier option actually collapses to the vanilla. For example the up and out price is corrected by

noTouchProbability x ( trueVanillaPrice - vannaVolgaSmileVanillaPrice )

so if noTouchProbability tends to one, the up and out price tends to the vanilla price computed on the original smile. The latter price has to be provided as an input to the model if adaptVanDelta = true.

I don’t actually know if this method has a footing in the literature or if it is a proprietary approach.

Best Regards
Peter

On 20 Apr 2017, at 17:39, Igor Swie <[hidden email]> wrote:

Hello,

I've seen that there is an additional correction to the Vanna Volga one when setting the adaptVanDelta to true in the VannaVolgaBarrierEngine.

I haven't found this correction in usual textbooks.

Who can explain this extra correction?

 

Thanks

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