In this white paper Trilemma proposes that when the traded vanilla options prices are too scarce, data vendors extend the market and produce complete and smooth implied volatility surfaces. When the underlying price moves or time passes, the surface is recalibrated from a new intake of traded derivatives prices instead of being recomputed from an underlying probabilistic hypothesis. And, once it is observed that implied volatility is traded and stochastic, the market is solicited again for the prices of options on volatility indexes (for example, VIX options) and the latter are repackaged and redistributed in turn in a refinement of the market synchrony, instead of upgrading the theoretical probability distribution underlying the Black-Scholes-Merton model (BSM) to stochastic volatility. that an outdated, yet very entrenched, metaphysical category in derivatives pricing has to give way once the market is conceived as a machine or a technology and no longer as a theory. The medium we need to abolish, when thinking of the material relationship between a contingent payoff and its present market price, is probability. Just as there is no absolute time rigidly attaching to the ether, but only time defined relatively to the material procedure of the synchronisation of clocks, there is no absolute probability with which to distribute the underlying and value contingent claims accordingly. Rather, probability is defined relatively to the frame of reference, whereas the real, intrinsic relation is the one that prevails between the contingent claim and its market price.
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