DEFINITION of 'Local Volatility'
A model used in quantitative finance to calculate the unpredictability of the underlying current asset of a financial derivative. Because of the treatment of the underlying asset price as the sole random variable, local volatility models are not suitable for the pricing of all options, such as cliquet options.
Local variance, another calculation used in quantitative finance, is the square of local volatility.
INVESTOPEDIA EXPLAINS 'Local Volatility'
Local volatility models are often used alongside stochastic volatility models in order to compare assumptions on different derivative valuations. The local volatility model "knows" volatilities in advance, while in stochastic volatility models volatility is treated as an uncertainty. The concept of local volatility was put forth by Emanuel Derman and Iraj Kani.

Cliquet
An extended exotic option that periodically settles and resets ... 
Financial Modeling
The process by which a firm constructs a financial representation ... 
Black Scholes Model
A model of price variation over time of financial instruments ... 
Option Pricing Theory
Any model or theorybased approach for calculating the fair ... 
Binomial Tree
A graphical representation of possible intrinsic values that ... 
Binomial Option Pricing Model
An options valuation method developed by Cox, et al, in 1979. ...

What are some examples of ways that sensitivity analysis can be used?
Sensitivity analysis is an analysis method that is used to identify how much variations in the input values for a given variable ... Read Full Answer >> 
What is the difference between an optionadjusted spread and a Zspread in reference ...
Unlike the Zspread calculation, the optionadjusted spread takes into account how the embedded option in a bond can change ... Read Full Answer >> 
In what ways can a sinking fund affect bond returns?
The effective yield of a bond sinking fund to an investor should not be considered similar to a bond nonsinking fund. Both ... Read Full Answer >> 
How is the 8020 rule (Pareto's Principle) used in macroeconomics?
The 8020 rule was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century, ... Read Full Answer >> 
Can delta be used to calculate price volatility of an option?
The delta of an option is a component of the BlackScholes option pricing formula, which provides the implied volatility ... Read Full Answer >> 
What are some of the uses of the coefficient of variation (COV)?
In statistics, the coefficient of variation (COV) is a simple measure of relative event dispersion. It is equal to the ratio ... Read Full Answer >>

Options & Futures
Breaking Down The Binomial Model To Value An Option
Find out how to carve your way into this valuation model niche. 
Options & Futures
The "True" Cost Of Stock Options
Perhaps the real cost of employee stock options is already accounted for in the expense of buyback programs. 
Options & Futures
The Benefits And Value Of Stock Options
The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options. 
Options & Futures
Understanding Option Pricing
Take advantage of stock movements by getting to know these derivatives. 
Options & Futures
The ABCs Of Option Volatility
The mystery of options pricing can often be explained by a look at implied volatility (IV). 
Fundamental Analysis
Calculating the HerfindahlHirschman Index (HHI)
The HerfindhalHirschman Index, (HHI) is a measure of market concentration and competition among market participants. 
Fundamental Analysis
Calculating Net Interest Margin
Net interest margin is a metric used to measure the effectiveness of a company’s investment decisions, particularly financial institutions. 
Investing
What More Volatility Means For Momentum Stocks
One byproduct of the recent tick higher in bond yields: a meaningful rise in volatility for both stocks and bonds. 
Options & Futures
How & Why Interest Rates Affect Options
The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations. 
Economics
Why The U.S. Economy Is Ready For Liftoff
Though the U.S. economy is once again underperforming expectations, as it has for the past five years, the economy is ready for a (Fed) interest rate hike.