Variational Autoencoders: A Hands-Off Approach to Volatility

A volatility surface is an important tool for pricing and hedging derivatives. The shows the that implied by market price of option on asset as a function option's strike maturity. Often, data incomplete it necessary to estimate missing points partially observed surfaces. In this paper, we show how variational autoencoders can be used task. first step derive latent variables construct synthetic surfaces are indistinguishable from those historically. second determine generated our fits available closely possible. As dividend step, produced also in stress testing, simulators developing quantitative investment strategies, valuation exotic options. We illustrate procedure demonstrate its power using foreign exchange data.