Abstract
This paper develops a method to analytically derive RNDs (risk-neutral distributions) from volatility smiles. The strike price measure in the volatility smile does not have to be the strike price itself. It can be moneyness, the delta, or other popular strike price measures. The method utilizes analytical derivatives of the volatility smile that come with parametric interpolations of observed data on options. This makes numerical second derivatives of the call price function unnecessary. A worked-out example shows that the analytically derived RNDs are free of distortions associated with numerical second derivatives. The proposed method should be useful to practitioners.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
