Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/40192
Authors: 
Wystup, Uwe
Year of Publication: 
2008
Series/Report no.: 
CPQF Working Paper Series 11
Abstract: 
The vanna-volga method, also called the traders’ rule of thumb is an empirical procedure that can be used to infer an implied-volatility smile from three available quotes for a given maturity. It is based on the construction of locally replicating portfolios whose associated hedging costs are added to corresponding Black-Scholes prices to produce smile-consistent values. Besides being intuitive and easy to implement, this procedure has a clear financial interpretation, which further supports its use in practice.
Document Type: 
Working Paper

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