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2015 | OriginalPaper | Chapter
Smile Risk Management
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In Chapter 3, we discussed how we can manage market risk when our valuation model is Black-Scholes. In this chapter we will go through some of the models that we described in the chapter on smile pricing, Chapter 4, and discuss the new or modified risk management issues that arise in each case. Specifically, we will discuss risk management under the following models:Black-Scholes with term structure (bsts): see Section 4.2Local volatility (lv): see Section 4.9Mixed local/stochastic volatility (lsv): see Section 4.12 In each case, we will take care to clarify the nature of the risk factors.