Abstract
This note describes the intuition and the mathematics behind the Vanna-Volga method for pricing derivatives in the foreign-exchange markets. After building the intuition through the lens of risk neutral density and movement in volatility smile, the note explains the mathematics of the necessary adjustment to the Black-Scholes valuation formula in terms of its Greeks (Vega,Vanna and Volga).
Additional Information
| Product Type | Technical Note |
|---|---|
| Reference No. | F&A0531TEC |
| Title | Probability in Finance - IV: The Vanna-Volga Method |
| Pages | 21 |
| Published on | Feb 5, 2016 |
| Authors | Virmani, Vineet; |
| Area | Finance and Accounting (F&A) |
| Discipline | Finance |
| Sector | Education |
| Keywords | Derivatives Pricing; Volatility Smile; Vanna-Volga Method; Foreign-Exchange Options; Black-Scholes Formula |
| Access | For All |
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