Mapping Option Vega onto a Reduced Volatility Surface

Summary

The document asks how to represent a portfolio’s vega when its original volatility surface has many strike pillars but the target surface retains only three. Vega is described as distributed across the original grid of maturities and strikes, leaving the question of what to do with exposures tied to omitted strikes. This is a practical risk representation problem: a reduced set of volatility risk factors needs to account for exposures that no longer have direct matching pillars.

The document provides no proposed mapping method, calculation, or answer. It does not specify how the reduced strikes are selected, how volatility changes are interpolated, or what risk metric should be preserved. Any remapping would therefore require additional assumptions about the surface parameterization and the intended meaning of equivalent risk; the post itself is only a question, not evidence that a particular aggregation or interpolation is appropriate.

Key ideas

• The question concerns translating strike-level vega from a dense surface to a surface with fewer strike pillars.
• The original exposure spans both volatility maturities and strikes.
• The document does not provide a remapping rule or a worked example.
• A valid mapping depends on the reduced surface representation and the risk measure being preserved.

Tags

# How could option vega be remapped on reduced volatility surface?


# How could option vega be remapped on reduced volatility surface?












try to be clear to ask my question: Suppose the original vol surface is a n by m matrix where n is the number of pillars in the volatility term structure and m is the number of strikes. According to my portfolio of options with different strikes and maturities, suppose my vega is distributed along the original n by m matrix.

Suppose then I somehow have to remap vega a reduced volatility surface with just 3 of original strikes, how shoud I take into account the vega associated with the remaining n-3 strikes in the original vol surface?

Thanks a lot!

V.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.