VOLATILITY SMILE CONSISTENT OPTION MODELS: A SURVEY

Abstract

The developing literature on "smile consistent" no-arbitrage models has emerged from the need to price and hedge exotic options consistently with the prices of standard European options. This survey paper describes the steps through which this literature has evolved by providing a taxonomy of the various models. It highlights the main ideas behind the different models, and it outlines their advantages and limitations. Practical issues in implementing the models are also discussed.