Understanding the volatility surface is a key objective for both practitioners and academics in the field of finance. Implied volatilities evolve randomly and so models of the volatility surface¿which is formed from implied volatilities of all strikes and expirations¿need to explicitly reflect this randomness in order to accurately price, trade, and manage the risk of derivative products.



Author and financial professional Jim Gatheral is intimately familiar with these issues and, in The Volatility Surface, he shares his many years of knowledge and experience to help make sense of it all. Written by a practitionerfor practitioners, The Volatility Surface examines why options are priced as they are and¿starting from a powerful representation of implied volatility in terms of a weighted average ofrealized volatilities¿explores the implications of various popular models for pricing.

The first half of this book focuses on setting up the theoretical framework, while the later chapters are oriented towards practical applications. Informative and accessible, The Volatility Surface:

• Contains a detailed derivation of the Heston model and explanations of many other popular models such as SVJ, SVJJ, SABR, and CreditGrades
• Discusses the characteristics of various types of exotic options from the humble barrier option to the super exotic Napoleon
• Exhaustively covers volatility derivatives with elegant and robust presentations of the latest research
• Examines performance of exotic cliquet contracts through in depth case studies of actual bonds that have already matured

The purpose of The Volatility Surface is not to just present results, but to provide you with ways of thinking about and solving practical problems that should have many other areas of application. So by the time you finish reading this guide, you ll have a firm understanding of volatility surface modeling as well as a better idea of how you can apply the results of these models to real world situations.

Filled with in depth insights, expert advice, and real world examples, The Volatility Surface will get you up to speed on the latest theories underlying options pricing as well as familiarize you with the history and practice of trading in the equity derivatives markets.