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    On the implied volatility layers under the future risk-free rate uncertainty

    199287_199287.pdf (220.1Kb)
    Access Status
    Open access
    Authors
    Hin, L.
    Dokuchaev, Nikolai
    Date
    2014
    Type
    Journal Article
    
    Metadata
    Show full item record
    Citation
    Hin, L. and Dokuchaev, N. 2014. On the implied volatility layers under the future risk-free rate uncertainty. International Journal of Financial Markets and Derivatives. 3 (4): pp. 392-408.
    Source Title
    International Journal of Financial Markets and Derivatives
    DOI
    10.2139/ssrn.2287658
    ISSN
    17567130
    Remarks

    Copyright © 2014 Inderscience Enterprises Ltd

    URI
    http://hdl.handle.net/20.500.11937/22516
    Collection
    • Curtin Research Publications
    Abstract

    This paper suggests a method of estimation of the implied volatility smile uncertainty of the observed options prices due to future risk-free rate uncertainty. The purpose is to quantify the range of uncertainty under different scenarios. We consider the setting where both the implied volatility and the risk free rate are calculated jointly from the observed option prices. Due to the cumulative risk-free rate uncertainty, the corresponding system of equations is underdetermined, leading to uncertainty in the volatility surface. We estimate the size of implied volatility layers between the surfaces representing the upper and lower bounds for the implied volatilities for the future risk-free rate uncertainty, defined by current Libor rate and the size of fluctuation estimated from the historical data.

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