Subject: contstraints on the shape of a smile
stinson , vince , zimin ,
here ' s a brief document on constraints on the shape of a smile for a fixed
expiry date .
the constraints are neccessary and sufficient for no arbitrage in this case .
i ' ve used a template created by dr . leppard which is why it looks so scary .
if you need constraints in the time direction then i will have to think a
little bit more about it .
i think constraints in this direction are very model depenendent e . g .
stochastic volatility and local volatility models
will throw up different constraints .
steve ,
i am not sure if our traders ( or quants for that matter ) are aware of these
constraints
and some desks are beginning to build smiles . . .
regards
sharad