Quite remarkably, the model provides prices for vanilla options consistent with observed smile and skew effects, while making it possible to detect and quantify the correlation risk in multiple-asset derivatives like basket options. In particular, it can reproduce and quantify the asymmetric conditional...
In particular, we obtain a new, relative-value, model for pricing LETF options. The derivation makes strong use of the path-dependency result of Part I. As a consequence, we derive a simple non-parametric formula which links the volatility skew of an LETF with the volatility skew of the...