by Gurdip Bakshi, John Crosby, Xiaohui Gao
Continue on SelfMadeQuant
Suggested foundations for volatility models and surfaces and options and derivatives pricing. Specialist prerequisites vary by paper.
Follow diffusion-based models and their assumptions.
Separate conditional volatility from observed returns.
Build replication and risk-neutral probabilities in a tractable model.
Distinguish pricing probabilities from physical forecasts.
Study a correlated stochastic-variance model.
Interpret prices across strikes and expiries.
Connect the pricing equation, closed-form value and implied volatility.
Start in discrete time, move to Brownian motion, then read the original pricing argument and simulate it.