Local Volatility
Local Volatility — Deterministic spot-time vol field calibrated to the vanilla surface.
Definition
Local Volatility refers to deterministic spot-time vol field calibrated to the vanilla surface. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
Options and futures embed views on vol, skew, and path that cash markets only hint at. When deterministic spot-time vol field calibrated to the vanilla surface shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what local volatility is saying. If deterministic spot-time vol field calibrated to the vanilla surface moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
State the expiry and Greek exposure; unmarked vol or pinning effects rewrite the thesis. Prefer a short written null hypothesis for Local Volatility: what would falsify the current reading in the next window?