[Quantlib-dev] EnhancedBlackScholesProcess which supports Vega Tests

[Michael H. <Mic...@gm...>]

Hello all,

 

i recently analyzed the sensitivities of a new asian style path dependent
option with quantlib and i ran into the following problem:

 

I wanted to do some Vega tests and I had to bump the Local Volatility
Surface to figure out where the main vega sensitivities of my product are in
terms of time bucket and moneyness. But this was not easy to do with
standard quantlib tools. My setup was a BlackScholesMerton Process as
underlying and as a BlackVolTermStructure is passed on the
BlackVarianceSurface which holds my Implied Volatility Surface. What the
BlackScholesProcess does, it figures out what is behind my
BlackVolTermStructure and builds the right LocalVolTermStructure out of it.
Then when I run my Monte Carlo engine it asks this LocalVolTermStructure at
every discrete step of my path for the local vol and uses that as a
diffusion term. So how do I stress the Local Volatility Surface? Since my
drift term is always calculated on demand instantaneously it is not an easy
thing to do.

 

What I could stress without problems is my Implied Volatility Surface. But
this is not what I want. And calculating back how to stress my implied
Volatility Surface to get the stress on my Local Volatility Surface the way
I want is also not very easy to do since it also depends on the way I
interpolate and extrapolate my BlackVariance Surface.

 

I solved this problem by building up an Enhanced Black Scholes Process which
takes as parameters a stress level and a square of the local Volatility
Surface which it stresses on demand. I thought maybe anyone is interested in
my solution? I already tested it and it works fine. The solution itself is
quite easy and I am working with it so far without any problems. I would
like to contribute it and maybe we can together improve it and enhance
Quantlib?

 

Since this is my first experience with Quantlib Mailing Lists I am not quite
sure if I can attach my cpp files? Can anybody give me some advice?

 

Greetings and Happy Easter to you

Michael