What Does Today's Smile Imply About Future Volatilities (original) (raw)

Abstract

The paper presents a simple and financially justifiable way to extract from today's plain vanilla option prices the evolution of the smile surface in the (Q) measure. By combining this information with (P)-measure estimation of the dependence of implied volatility on the underlying, one can i) obtain information about the existence and magnitude of a volatility risk premium; ii) devise trading strategies; iii) price options such as Forward Volatility Agreements (FVAs).

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