This chapter provides an interesting overview of option modelling and the realities of its application in practice. Even though this chapter is a non-technical foundation for the rest of the book, the discussion is geared toward experienced quants who will appreciate the frank observations about academic rigor of option ... click here for more details.

A “smile” refers to the observed dependence on the strike price of the implied volatility for options of the same maturity, which clearly violates the assumptions of the Black-Scholes pricing formula from which the implied volatility is derived. This chapter introduces and defines the concepts of a smile and ... click here for more details.

This chapter provides a valuable and thorough presentation of equity smiles when the stock price is modeled as a jump-diffusion process. The chapter explains in detail that without unrealistic assumptions (including detailed knowledge about pricing options in all future states), perfect replication with jumps is not possible, then moves ... click here for more details.