Local Volatility Interview Guide
Local volatility interview guide covering local volatility intuition, surface fit, dynamics, limitations, examples, and model comparisons.
Candidates discussing volatility models and option surface fitting.
Local volatility makes volatility state-dependent
A local volatility model lets volatility depend on underlying level and time, often calibrated to fit an observed option surface.
Surface fit is not the whole model
A model can fit today option prices but still imply unrealistic future smile dynamics or hedge behavior under market moves.
Concrete example
A local-vol model may reproduce vanilla option prices across strikes while producing different barrier-option values than another model.
Compare with stochastic volatility
Local volatility uses deterministic state dependence, while stochastic volatility treats volatility as an additional random process.
Common mistakes
Candidates often equate calibration with truth. Interview answers should separate fitting prices from modeling future dynamics.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.