The SABR model is a popular mathematical model used in finance to determine the volatility of an underlying asset. Developed by Patrick Hagan, Deep Kumar, Andrew Lesniewski, and Diana Woodward, the model is named after the first letter of the last names of its creators.
The SABR model is widely used in the pricing of financial derivatives, particularly interest rate derivatives. It allows for the modeling of the volatility of the underlying asset as a function of both time and the asset's value. The model is based on the concept of stochastic volatility, which assumes that the volatility of the underlying asset is not constant but rather follows a random process.
The SABR model is popular because it provides a flexible framework for pricing derivatives under various market conditions. It is also capable of capturing the volatility smile, which is a phenomenon where options with different strike prices but the same maturity have different implied volatilities.
Overall, the SABR model is an important tool in financial modeling and risk management, particularly in the pricing of interest rate derivatives.
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