The Local Stochastic Volatility model is the main model used to take into account the correct pricing and hedging with the volatility dynamic. In this paper Adil Reghai, Head of Quantitative Research Equity & Commodity Markets, Natixis and Florian Monciaud, Quant Researcher - Equity Derivatives, Natixis, introduce a new methodology that combines Singular perturbation analysis and exotic greek computation. They obtain asymptotic formulae for the LSV impact which work extremely well. Tests are performed on the mostly traded Autocalls in the equity derivatives business.
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The paper was originally published here.
