VannaVolga pricer object for
DoubleTouch instrument using
Create and price a
DoubleTouch instrument object with a
BlackScholes model and a
method using this workflow:
VannaVolga pricer object for the
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The Vanna Volga method is an empirical procedure based on adding an analytically derived correction to the Black-Scholes price of the instrument.
The Vanna-Volga method consists of adjusting the Black-Scholes theoretical value (BSTV) by the cost of a portfolio which hedges three main risks associated to the volatility of the option: the Vega, the Vanna and the Volga.
The general formulation of the Vanna-Volga method suggests that the Vega, Vanna, and Volga values can be replicated by the weighted sum of at-the-money (ATM), risk-reversal (RR), and butterfly (BF) strategies.
Here, the weights are obtained by solving the system x = Aω
Given this replication, the Vanna-Volga method adjusts the Black-Scholes price of the option by the smile cost of the above weighted sum:
The resulting correction or overhedge turns out to be too large. So, the option value is modified as follows:
ρ is the risk-neutral probability of not hitting the barrier.
 Bossens, Frédéric, Grégory Rayée, Nikos S. Skantzos, and Griselda Deelstra. "Vanna-Volga Methods Applied to FX Derivatives: From Theory to Market Practice." International Journal of Theoretical and Applied Finance. 13, no. 08 (December 2010): 1293–1324.
 Castagna, Antonio, and Fabio Mercurio. "The Vanna-Volga Method for Implied Volatilities." Risk. 20 (January 2007): 106–111.
 Castagna, Antonio, and Fabio Mercurio. "Consistent Pricing of FX Options." Working Papers Series, Banca IMI, 2006.
 Fisher, Travis. "Variations on the Vanna-Volga Adjustment." Bloomberg Research Paper, 2007.
 Wystup, Uwe. FX Options and Structured Products. Hoboken, NJ: Wiley Finance, 2006.