NONPARAMETRIC MODEL CALIBRATION FOR DERIVATIVES

Consistently fitting vanilla option surfaces is an important issue in derivative modelling. In this paper, we consider three different models: local and stochastic volatility, local correlation, hybrid local volatility with stochastic rates, and address their exact, nonparametric calibration. This calibration process requires solving a nonlinear partial integro-differential equation. A modified alternating direction implicit algorithm is used, and its theoretical and numerical analysis is performed.