Price Volatility
The data used in the specification of a Volatility Skew Structure must be Price Volatilities.
The Price Volatility of a security is calculated using historical prices of
that security in a particular currency. In order to completely specify a
security's Price Volatility, it is necessary to specify:
- a Currency in which the security prices were collected;
- a Term for the price volatility;
- a Basis for the price volatility [always taken to be ANNUALIZED for now]; and
- a Value for the price volatility.
Specifying the Price Volatility in this way facilitates converting a
security's price volatility from one price currency into a price volatility in another
price currency. Such conversions are very often required when dealing with
cross-currency option securities.
In order to facilitate the conversion of a security's Price Volatility from an
initial price currency into a target price currency it is necessary to use the
appropriate Price Correlation. This conversion requires all of the following:
- A Price Correlation between the security and the target price currency;
- A Price Volatility for the target price currency;
- The price currency of the Price Correlation must be the same price currency as
that of the security's initial Price Volatility;
- The price currency of the Price Correlation must also be the same as that of
the target price currency's Price Volatility.
[ NOTE: This conversion is usually done automatically if the active World
State has all the necessary data. The user is only informed if such a conversion
was not possible due to insufficient data! ]