Local volatility is a concept in quantitative finance that refers to the volatility of an asset that varies with both the asset price and time. Dupire Volatility Equation which is a stochastic equation is used to calculate the local volatility from the observed option prices. The problem at hand is that some of the assumptions of Black Scholes are now being re-introduced into different stochastic equations and we specifically look at reinvested dividend and transaction cost as some of Black Scholes assumption.
Download