**Three types of models:**

-local volatility models,

-stochastic volatility models and

-deterministic volatility models

**Local volatility models** assume the volatility is constant (standard deviation) and hence a function of price and time. The local volatility model is therefore considered a generalisation of the Black-Scholes model.

**Two factor stochastic volatility model** (Stochastic Alpha Beta Rho – Sabr):

− Assumes volatility is stochastic, Sabr (ρ, υ).

Beta fixes the underlying volatility process and is fixed at 80% for equities, 0 for IR (volatilities are Gaussian) and 1 for currencies (volatilities are lognormal)

**Three factor deterministic volatility model** (Quadratic – Quad):

− Quad(ρ, υ, γ) – no assumption on the dynamics of the volatility process.

**Four factor deterministic volatility model** (Stochastic Volatility Inspired – SVI):

− SVI(ρ, υ, γ, ξ) – no assumption on the dynamics of the volatility process

Most South African banks seem to use **deterministic models** with up to 6 factors.

**References: **

A lot of research has been published by Dr Antonie Kotzé…

http://www.quantonline.co.za/publications_and_research.html http://www.quantonline.co.za/documents/Volatility%20Surface%2025%20Feb%202011.pdf

http://www.quantonline.co.za/documents/Generating%20South%20African%20Volatility%20Surface.pdf

The route change via Sea Point was really appreciated (versus Mordor).

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My first attempt at this event, must admit i did not realize it was 1000m of elevation but excellent training…

A really fantastic run, must admit the wind was a bit annoying, very happy with my time.

Thank you Mandy Feyt for the company.

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