Why Does Volatility Smile and Smirk?

The Volatility is Constant in the Black-Scholes Model… In the Black-Scholes model, the volatility of a stock price is assumed to be constant, independent of the strike or time-to-maturity. So if the model was correct, a plot of the Black Scholes volatility implied from option prices with a constant time to expiry, would be a […]

Introduction to Stochastic Calculus

Foundations of Stochastic Calculus Stochastic Calculus is a branch of mathematics that deals with random processes. Beyond probabilities it also has links with differential equations, and is widely used in finance particularly for option modelling. Kiyosi Itô (1915-2008) pioneered the field inventing the concept of stochastic integral and stochastic differential equations. Itô Stochastic Integral In […]