Knowledge

Interpolation Methods for Volatility Surface

A mathematical process in the pricing of options used to plot the volatility surface (varying strike prices and expiry dates that assume that the volatility of the underlying fluctuates) from a set of implied volatilities. These methods include: bi-linear: two dimensional (horizontal and vertical), bi-cubic: two dimensional (weighted average of the nearest sixteen pixels in a rectangular grid), and thin plate: produces a smooth continuous surface.