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Keywords:

  • affine concatenation;
  • smile;
  • forward skew;
  • characteristic function

Abstract

This paper presents a methodology to introduce time-dependent parameters to affine models. The methodology is applied to the well-known Heston's model for valuation of spot and forward start vanilla options. Calibration to the volatility surface of the Eurostoxx 50 index is carried out and the impact of calibration in the forward skew explored. Copyright © 2009 Wilmott Magazine Ltd