medium · Quantitative Finance derivatives
What is the primary operational advantage of the Local Volatility model over the standard Black-Scholes-Merton framework?
- It can be calibrated to exactly reproduce the entire observed market volatility surface.
- It fully eliminates the ongoing need for continuous delta-hedging entirely.
- It is computationally simpler to evaluate than the closed-form Black-Scholes formula.
- It models the instantaneous volatility itself as a separate, mean-reverting stochastic process.
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