# Local Volatility ⎊ Area ⎊ Resource 2 --- ## What is the Volatility of Local Volatility? Local volatility refers to the instantaneous volatility of an underlying asset at a specific price level and time point. It is a key concept in advanced options pricing models that seek to account for the volatility smile observed in market data. Unlike implied volatility, which represents a single value for a specific option, local volatility describes a surface of volatility values across all strikes and maturities. ## What is the Model of Local Volatility? The local volatility model, often associated with Dupire's work, provides a theoretical framework for deriving this volatility surface from market prices of European options. This model assumes that volatility is a deterministic function of the underlying asset price and time, allowing for consistent pricing of options across different strikes. The model's primary advantage is its ability to perfectly match observed market prices for European options. ## What is the Calibration of Local Volatility? Calibration involves fitting the local volatility surface to market data to ensure accurate pricing of options. This process requires solving a partial differential equation to determine the unique local volatility function that reproduces the observed implied volatility surface. The resulting surface is then used to price more complex, path-dependent derivatives, providing a robust tool for risk management. --- ## [Option Pricing Kernel Adjustment](https://term.greeks.live/term/option-pricing-kernel-adjustment/) ## [Vega Compression Analysis](https://term.greeks.live/term/vega-compression-analysis/) ## [Genesis of Non-Linear Cost](https://term.greeks.live/term/genesis-of-non-linear-cost/) ## [Portfolio VaR Proof](https://term.greeks.live/term/portfolio-var-proof/) --- ## Raw Schema Data ```json { "@context": "https://schema.org", "@type": "BreadcrumbList", "itemListElement": [ { "@type": "ListItem", "position": 1, "name": "Home", "item": "https://term.greeks.live" }, { "@type": "ListItem", "position": 2, "name": "Area", "item": "https://term.greeks.live/area/" }, { "@type": "ListItem", "position": 3, "name": "Local Volatility", "item": "https://term.greeks.live/area/local-volatility/" }, { "@type": "ListItem", "position": 4, "name": "Resource 2", "item": "https://term.greeks.live/area/local-volatility/resource/2/" } ] } ``` ```json { "@context": "https://schema.org", "@type": "WebSite", "url": "https://term.greeks.live/", "potentialAction": { "@type": "SearchAction", "target": "https://term.greeks.live/?s=search_term_string", "query-input": "required name=search_term_string" } } ``` ```json { "@context": "https://schema.org", "@type": "FAQPage", "mainEntity": [ { "@type": "Question", "name": "What is the Volatility of Local Volatility?", "acceptedAnswer": { "@type": "Answer", "text": "Local volatility refers to the instantaneous volatility of an underlying asset at a specific price level and time point. 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