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Monte Carlo simulation for SABR

  • Thread starter Thread starter Aber
  • Start date Start date

Aber

Joined
8/7/15
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I want to construct the SABR Implied Volatility across differerent strikes (hence the vol smile) using the Euler Scheme on spot and volatility as described in equation 3.1 here:
http://ta.twi.tudelft.nl/mf/users/oosterle/oosterlee/SABRMC.pdf
or page 12 here:
http://janroman.dhis.org/finance/SABR/SABR.pdf

Let's say I have the SABR parameters (for instance T=1, alpha=25%, Beta=0.5, rho = 0.5, spot = 100) given. Can anyone please explain and hopefuly provide a "step-by-step" guide on how to construct the SABR volatility smile/skew using this Monte Carlo method.

I have implemented the algorithm itself (it's pretty simple) but don't know how to use it.
 

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