Decisions in the Derivate MarketThe financial systems and markets are vast and play an important role in modern society and therefore it is important to be able to understand and analyze them.
One important part to be able to understand the financial markets is the volatility. The problem is that the volatility is not directly observable, which makes it hard to understand and analyze. The accumulated understanding however, from different market participants, is reflected in the derivative prices and this information we try to extract by solving an inverse problem.
We are extracting the information and represent it by a local volatility surface, or by and equivalent risk neutral probability distribution (surface). High quality in these surfaces are crucial to be able to make accurate estimations of the risks and premiums in the market. Thus a good measrument method is the foundation for improving financial decisions.