The Normalizing Transformation of the Implied Volatility Smile
10 Pages Posted: 23 Aug 2012
Date Written: October 2012
We study specific nonlinear transformations of the Black–Scholes implied volatility to show remarkable properties of the volatility surface. No arbitrage bounds on the implied volatility skew are given. Pricing formulas for European payoffs are given in terms of the implied volatility smile.
Keywords: implied volatility, no arbitrage bounds, variance swap, gamma swap
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