The volatility surface, formed from implied volatilities of all strikes and expirations, moves around. This randomness needs to be explicitly modeled for the effective pricing, trading, and risk management of equity derivatives. Focusing on equity derivatives, author Jim Gatheral examines why options are priced as they are and, starting from a powerful representation of implied volatility in terms of a weighted average of realized volatilities, explores the implications of various popular models for pricing. Along the way he also discusses default risk models, capital structure arbitrage, quadratic variation-based payoffs, VIX futures contracts, and much more. Throughout The Volatility Surface, specific examples are considered to make theory come to life for practitioners.
