## Convex Interpolation

### Convex Interpolation

I want to interpolate option prices across stock prices and volatilities. Since option prices are convex w.r.t. spot price, I guess usual interpolation techniques(splines, parabolic, linear)do not apply. I am wondering if there's existing code available for download?
Last edited by kubila on Mon May 11, 2009 3:28 am, edited 1 time in total.
kubila

Posts: 9
Joined: Fri Mar 06, 2009 10:46 pm

Are you thinking of some kind of least squares or min-max algos?

Why do the usual interpolators not work?

Cuchulainn

Posts: 676
Joined: Mon Dec 18, 2006 2:48 pm
Location: Amsterdam, the Netherlands

### why not work

Cuchulainn wrote:Are you thinking of some kind of least squares or min-max algos?

Why do the usual interpolators not work?

The context is that I have a finite difference result of option prices and now I want to interpolate them. I was thinking that since the option prices are convext against the spot stock price, when we interpolate we should do some kind of a convex interpolation to avoid arbitrage. Am I wrong? Please advise.
kubila

Posts: 9
Joined: Fri Mar 06, 2009 10:46 pm

Hi Kubila,

Here is an article by Hagan and West. It is for yield curve but it might be useful in your case.

http://www.scribd.com/doc/6911816/Hagan ... for-Curves

hth

D

Cuchulainn

Posts: 676
Joined: Mon Dec 18, 2006 2:48 pm
Location: Amsterdam, the Netherlands

Cuchulainn wrote:Hi Kubila,

Here is an article by Hagan and West. It is for yield curve but it might be useful in your case.

http://www.scribd.com/doc/6911816/Hagan ... for-Curves

hth

D

Thanks a lot! That's exactly what I want!
kubila

Posts: 9
Joined: Fri Mar 06, 2009 10:46 pm

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