Quanto Implied Volatility Smile

Skewing Quanto with Simplicity

“…In closing we note that while the method delivers high accuracy and speed in the local volatility/Gaussian copula setting, less precision is expected in stochastic volatility models as observed in [3]. This is because the joint distribution of the two drivers post the marginal quantile transforms in stochastic volatility models deviates from the Gaussian assumption.…”

“…which can be equivalently re-expressed in terms of the calibrated implied volatility surface, σX (K, T ) and σS (K, T ). Care needs to be taken in the tail extrapolation of the implied vol to prevent arbitrages and ensure accuracy and stability (see [3] for detailed discussions). This leads to the following distribution maps for the underlyings:…”