Armed with the Hardy Decomposition for option prices, it now becomes much easier to understand why the smile exists. To be clear, options trader might use the smile to manage supply & demand, but here we discuss the mathematical basis for smile - which is important if you want to understand how to generate smile … Continue reading Smile, it’s Volga!
Tag: convexity
Why does the yield curve slope upwards?
In this post I give a short, but I think rather usefully direct reason for why the yield curve should slope upwards. All it requires is for you to put yourself in the shoes of an investor that has to lock up their money in a bond for a fixed amount of time (and a … Continue reading Why does the yield curve slope upwards?
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