Implied volatilities are frequently used to quote the prices of options. The implied volatility of a European option on a particular asset as a function of strike price and time to maturity is known as the asset's volatility surface. Traders monitor movements in volatility surfaces closely. In...

Researchers such as Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) have proposed a one-factor model for asset prices that is exactly consistent with all European option prices. In this model, which we refer to as the implied volatility function (IVF) model, the asset price...