Abstract
We develop a new methodology for computing smile sensitivities (Vegas) for European securities priced under the SABR model when the latter is calibrated to more market volatilities than the number of available model parameters. In this situation the hedging portfolio is non unique and how to obtain Vegas that satisfy a trader's intuition is not straightforward. The methodology can be easily generalized to all single maturity underparameterized models and to barrier options priced under an underparameterized local volatility model. Copyright © 2011 Wilmott Magazine Ltd.
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