Page 177 - PRIAA Glossary

VOLATILITY CUBE
A 4-dimensional representation of the variation of implied volatility for a European interest rate swaption with respect to (i) strike, (ii) time to maturity of the swaption and (iii) tenor of the underlying interest rate swap.
VOLATILITY SKEW
A term used to describe the variation of implied volatility with respect to the strike of an option, for a fixed maturity. A volatility skew refers to the shape where the implied volatility curves upwards on the left-hand-side of the at-the-money strike, but continues to slope downwards on the right-hand- side of the at-the-money strike. Skews are typical of long- term equity options.
VOLATILITY SMILE
A term used to describe the variation of implied volatility with respect to the strike of an option, for a fixed maturity. A volatility smile refers to the shape where the implied volatility curves upwards on either side of the at-the-money strike. Smiles are typical of short-term equity options and FX options.
VOLATILITY SURFACE
A 3-dimensional graphical representation of the variation
of implied volatility for a European option with respect to (i) strike and (ii) time to maturity. Implied volatility is typically assigned to the z-axis, while strike and time-to-maturity are assigned to the x and y-axes respectively. Volatility surfaces are applicable to equity, commodity and FX options, as well as interest rate caps and floors.
VOLCKER RULE
A proposal by American economist Paul Volcker with the aim of restricting banks from engaging in certain kinds of high- risk speculative trading on their own accounts.
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